Back to GetFilings.com
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended February 28, 2005
-----------------
OR
|_| TRANSITION REPORT SUBJECT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period from _____________ to _____________
Commission File Number: 0-11380
ATC HEALTHCARE, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 11-2650500
- ------------------------------------------ ----------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1983 Marcus Avenue, Lake Success, NY 11042
- ------------------------------------------ ----------------------------
(Address of Principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (516) 750-1600
----------------------------
Securities registered pursuant to Name of Exchange
Section 12 (b) of the Act: Title of Each Class on Which Registered
------------------- -------------------
Class A Common Stock, American Stock
$.01 par value Exchange
Securities registered pursuant to Section 12 (g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
Indicate by checkmark whether the registrant is an accelerated filer (as defined
in Rule 12 b-2 of the Securities Exchange Act of 1934.
Yes |_| No |X|
As of May 20, 2005, the approximate aggregate market value of voting stock held
by non-affiliates of the registrant was $9,391,613 based on a closing sale price
of $0.33 per share. The number of shares of Class A Common Stock outstanding on
May 20, 2005 was 28,459,433.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III is included in the Company's definitive
Proxy Statement for the Annual Meeting of Shareholders 2004, which information
is incorporated herein by reference. All references to "we", "us," "our," or
"ATC" in this Report on Form 10-K means ATC Healthcare, Inc.
Part I.
- -------
ITEM 1. Business
General
ATC Healthcare, Inc. ("ATC" or the "Company") is a Delaware corporation which
was incorporated in New York in 1978 and reincorporated in Delaware in May 1983.
Unless the context otherwise requires, all references to the "Company" include
ATC Healthcare, Inc. and its subsidiaries. The Company is a national provider of
medical supplemental staffing services. In August 2001, the Company changed its
name from Staff Builders, Inc. to ATC Healthcare, Inc.
Operations
We provide supplemental staffing to health care facilities through our network
of 52 offices in 33 states, of which 39 are operated by 31 licensees and 13 are
owned and operated by us. We offer our clients qualified health care associates
in over 60 job categories ranging from the highest level of specialty nurse,
including critical care, neonatal and labor and delivery, to medical
administrative staff, including third party billers, administrative assistants,
claims processors, collection personnel and medical records clerks. The nurses
provided to clients include registered nurses, licensed practical nurses and
certified nursing assistants. Other services include allied health staffing
which includes mental health technicians, a variety of therapists (including
speech, occupational and physical), radiology technicians and phlebotomists.
Clients rely on us to provide a flexible labor force to meet fluctuations in
census and business and to help them acquire health care associates with
specifically needed skills. Our medical staffing professionals also fill in for
absent employees and enhance a client's core staff with temporary workers during
peak seasons.
Clients benefit from their relationship with us because of our expertise in
providing properly skilled medical staffing employees to a facility in an
increasingly tight labor market. We have developed a skills checklist for
clients to provide information concerning a prospective employee's skill level.
Clients also benefit from no longer having to concern themselves with the
payment of employee wages, benefits, payroll taxes, workers compensation and
unemployment insurance for staff since these are paid through our Company.
We also operate a Travel Nurse Program whereby qualified nurses, physical
therapists and occupational therapists are recruited on behalf of the clients
who require such services on a long-term basis. These individuals are recruited
from the United States and foreign countries, including Great Britain,
Australia, South Africa and New Zealand, to perform services on a long-term
basis in the United States. We have contracted with a number of management
entities for the recruitment of foreign nurses. The management entities arrange
for the nurses' and therapists' immigration and licensing certifications so that
they can be employed in the United States.
We have expanded our client base to include nursing homes, physician practice
management groups, managed care facilities, insurance companies, surgery
centers, community health centers and schools. By diversifying our client list,
we believe it lessens the risk that regulatory or industry sector shifts in
staffing usage will materially affect our staffing revenues.
2
Licensee Program
Our licensing program is one of the principal factors differentiating us from
most of our competition. After agreeing to pay an initial license fee in
exchange for a grant of an exclusive territory, the licensee is paid a royalty
of approximately 55% (60% for certain licensees who have longer relationships
with us) of gross profit (in general, the difference between the aggregate
amount invoiced and the payroll and related expenses for the personnel
delivering the services). The licensee has the right to develop the territory to
its fullest potential. The licensee is also responsible for marketing,
recruiting and customer relationships within the assigned territory. All
locations must be approved by us prior to the licensee signing a lease for the
location. Various management reports are provided to the licensees to assist
them with ongoing analysis of their medical staffing operations. We pay and
distribute the payroll for the direct service personnel who are all employees of
our Company, administer all payroll withholdings and payments, invoice the
customers and process and collect the accounts receivable. The licensees are
responsible for providing an office and paying administrative expenses,
including rent, utilities, telephone and costs of administrative personnel.
We grant an initial license term of ten years. The agreement has an option to
renew for two additional five-year renewal terms, subject to the licensee
adhering to the operating procedures and conditions for renewal as set forth in
the agreement. In certain cases we may convert an independently owned staffing
business into a licensee. In those situations, we negotiate the terms of the
conversion on a transaction-by-transaction basis, depending on the size of the
business, client mix and territory.
Sales of licenses are subject to compliance with federal and state franchise
laws. If we fail to comply with the franchise laws, rules and regulations of the
particular state relating to offers and sales of franchises, we will be unable
to engage in offering or selling licenses in or from such state. To offer and
sell licenses, the Federal Trade Commission requires us to furnish to
prospective licensees a current franchise offering disclosure document. We have
used a Uniform Franchise Offering Circular ("UFOC") to satisfy this disclosure
obligation. We must update our UFOC annually or upon the occurrence of certain
material events. If a material event occurs, we must stop offering and selling
franchises until the UFOC is updated. In addition, certain states require us to
register or file our UFOC with such states and to provide prescribed
disclosures. We are required to obtain an effective registration of our
franchise disclosure document in New York State and certain other states. We are
currently able to offer new franchises in 38 states.
For fiscal 2005, 2004, and 2003, total staffing licensee distributions net of
discontinued operations were approximately $ 6.0 million, $6.6 million, and $9.0
million, respectively.
Personnel, Recruiting and Training
We employ approximately 10,000 individuals who render staffing services and
approximately 122 full time administrative and management personnel.
Approximately 84 of these administrative employees are located at the branch
offices and 38 are located at the administrative office in Lake Success, New
York.
We screen personnel to ensure that they meet all eligibility standards. This
screening process includes skills testing, reference checking, professional
license verification, interviews and a physical examination. In addition, new
employees receive an orientation on our Company policies and procedures prior to
their initial assignment. We are not a party to any collective bargaining
agreement and consider our relationship with our employees to be satisfactory.
It is essential for us to constantly recruit and retain a qualified staff of
associates who are available to be placed on assignment as needed. Besides
advertising in the local classifieds, utilizing local office web sites and
participating in local and regional job fairs, we offer a variety of benefit
programs to assist in recruiting high quality medical staffing professionals.
3
This package provides employees access to medical, dental, life and disability
insurance, a 401(k) plan, opportunities for Continuing Education Credits,
partnerships with various vendors for discount programs (e.g., uniforms,
vacations and cruises, credit cards, appliances and cars), recognition programs
and referral bonus programs. In addition, we provide our licensees a
full-service human resources department to support the offices with policies and
procedures as well as assist with the day-to-day issues of the field staff.
Sales and Marketing
We begin a marketing and operational education program as soon as an office
becomes operational. This program trains the office manager, whether at a
licensee or a Company office, in our sales process. The program stresses sales
techniques, account development and retention as well as basic sales concepts
and skills. Through interactive lectures, role-plays and sales scenarios,
participants are immersed in the sales program.
To provide ongoing sales support, we furnish each licensee and corporate branch
manager with a variety of tools. A corporate representative is continuously
available to help with prospecting, customer identification and retention, sales
strategies, and developing a comprehensive office sales plan. In addition,
various guides and brochures have been developed to focus office management's
attention to critical areas in the sales process.
Each licensee and corporate branch manager is responsible for generating sales
in their territory. Licensees and corporate branch managers are instructed to do
this through a variety of methods in order to diversify their sales conduits.
The primary method of seeking new business is to call on health care facilities
in a local area. Cold calls and referrals are often used to generate leads. Once
granted an interview, the representative is instructed to emphasize the
highlights of our services.
Recent Acquisitions And Dispositions
Asset Purchase with CMS Capital Ventures
On February 28, 2003, we purchased from CMS Capital Ventures all the assets
relating to their office locations in Dallas/Fort Worth, Texas and Atlanta,
Georgia which provide temporary medical staffing services. The assets purchased
consisted primarily of intangible assets and goodwill. The primary operations of
CMS Capital Ventures were in a different segment of the medical staffing
business, and it was looking to divest its nurse staffing offices in Atlanta and
Dallas/Ft. Worth. We had an existing licensee in Atlanta that was seeking to add
revenue and additional contracts through the acquisition. We also were
interested in expanding our operations into the Dallas/Ft. Worth area and
believed these offices would provide a good base of business to establish our
presence. The negotiations for the asset purchase were conducted on an arms
length basis. The purchase price for the CMS Capital Ventures assets was $1.0
million cash, which was paid at closing. In April 2003 we sold our interest in
one of these temporary medical staffing companies to a franchisee for $0.13
million.
Assets Held For Sale
In December 2004, after reviewing the significant debt obligations of the
Company and the alternatives thereto, the Board of Directors of the Company
concluded and authorized the Company to sell its AllCare Nursing business. On
April 22, 2005, the Company sold substantially all of the assets of its AllCare
Nursing Services business, which consisted primarily of goodwill and accounts
receivable, to Onward Healthcare, Inc. ("Onward") of Norwalk, Connecticut, for
approximately $20.0 million in cash, of which $1.2 million was placed in escrow
pending the collection of the accounts receivable. AllCare Nursing was located
in Melville, New York, with offices in Union, New Jersey, and in Stratford,
Connecticut, and provided supplemental staffing and travel nurses to healthcare
facilities in the greater New York City metropolitan area, northern New Jersey,
and Connecticut.
4
The Company originally purchased AllCare Nursing, then known as Direct
Staffing Inc. and DSS Staffing Corp. (together "Direct Staffing"), in January
2002 for $30.2 million in five percent interest-bearing promissory notes. The
Company used the funds that it received from Onward to retire approximately
$13.0 million in bank debt and to repay and restructure the $28.1 million in
promissory notes outstanding to the sellers of Direct Staffing. In connection
with obtaining its lender's consent to the sale and paying down its bank debt,
the Company's revolving credit facility was permanently reduced from $35.0
million to $15.0 million. As a result of the repayment and restructuring of the
Direct Staffing promissory notes, those obligations were reduced from $28.1
million to $8.1 million.
The Company recorded a goodwill impairment of $3.8 million as of February
28, 2005, which represents the difference in the sales price of AllCare Nursing
at February 28, 2005 and the value of the net assets including goodwill that
the Company had on its financial statements as of that date.
The Company's consolidated financial statements reflect the financial
results of the AllCare Nursing business for the fiscal years 2005, 2004, and
2003 as a discontinued operation.
Competition
The medical staffing industry is extremely fragmented, with numerous local and
regional providers nationwide providing nurses and other staffing solutions to
hospitals and other health care providers. We compete with full-service staffing
companies and with specialized temporary staffing agencies as well as small
local and regional healthcare staffing organizations. There are three dominant
healthcare staffing companies that we compete with, including Medical Staffing
Network, American Mobil Nursing and Cross Country Nursing.
We compete with these firms to attract our temporary healthcare professionals
and to attract hospital and healthcare facility clients. We compete for
temporary healthcare professionals on the basis of the compensation package and
benefit package offered as well as the diversity and quality of assignments
available. We compete for hospital and healthcare facility clients on the basis
of the quality of our temporary healthcare professionals, price of our services
and the timely availability of our professionals with the requisite skills.
As HMOs and other managed care groups expand, so too must the medical staffing
companies that service these customers. In addition, momentum for consolidation
is increasing among smaller players, often venture capital-backed, who are
trying to win regional and even national accounts. Because the temporary
staffing industry is dominated generally by large national companies that do not
specialize in medical staffing, management believes that its specialization will
give it a competitive edge. In addition, our licensee program gives each
licensee an incentive to compete actively in his or her local marketplace.
Service Marks
We believe that our service trademark and the ATC(R) logo have significant value
and are important to the marketing of our supplemental staffing services. These
marks are registered with the United States Patent and Trademark Office. The
ATC(R) trademark will remain in effect through January 9, 2010 for use with
nursing care services and healthcare services. These marks are each renewable
for an additional ten-year period, provided we continue to use them in the
ordinary course of business.
Regulatory Issues
In order to service our client facilities and to comply with OSHA and Joint
Commission on Accreditation of Healthcare Organizations standards, we have
developed a risk management program. The program is designed to protect against
the risk of negligent hiring by requiring a detailed skills assessment from each
healthcare professional. We conduct extensive reference checks and credential
verifications for the nurses and other healthcare professionals that we might
hire.
5
Professional Licensure and Corporate Practice
Nurses and other healthcare professionals employed by us are required to be
individually licensed or certified under applicable state law. In addition, the
healthcare professionals that we hire frequently are required to have been
certified to provide certain medical care, such as CPR and anesthesiology,
depending on the positions in which they are placed. Our comprehensive
compliance program is designed to ensure that our employees possess all
necessary licenses and certifications, and we believe that our employees,
including nurses and therapists, have obtained the necessary licenses and
certification required to comply with all applicable state laws.
Business Licenses
A number of states require state licensure for businesses that, for a fee,
employ and assign personnel, including healthcare personnel, to provide services
on-site at hospitals and other healthcare facilities to support or supplement
the hospitals' or healthcare facilities' work force. A number of states also
require state licensure for businesses that operate placement services for
individuals attempting to secure employment. Failure to obtain the necessary
licenses could interrupt business operations in a specific locale. We believe we
have all of the required state licenses to allow us to continue our business as
currently conducted.
Regulations Affecting Our Clients
Many of our clients are reimbursed under the federal Medicare program and state
Medicaid programs for the services they provide. In recent years, federal and
state governments have made significant changes in these programs that have
reduced reimbursement rates. Future federal and state legislation or evolving
commercial reimbursement trends may further reduce, or change conditions for,
our clients' reimbursement. Such limitations on reimbursement could reduce our
clients' cash flows, hampering their ability to pay us.
Risk Factors
CURRENTLY WE ARE UNABLE TO RECRUIT ENOUGH NURSES TO MEET OUR CLIENTS' DEMANDS
FOR OUR NURSE STAFFING SERVICES, LIMITING THE POTENTIAL GROWTH OF OUR STAFFING
BUSINESS.
We rely substantially on our ability to attract, develop and retain
nurses and other healthcare personnel who possess the skills, experience and, as
required, licenses necessary to meet the specified requirements of our
healthcare staffing clients. We compete for healthcare staffing personnel with
other temporary healthcare staffing companies, as well as actual and potential
clients, some of which seek to fill positions with either regular or temporary
employees. Currently, there is a shortage of qualified nurses in most areas of
the United States and competition for nursing personnel is increasing. Demand
for temporary nurses over the last year has declined due to lower hospital
emissions and nurses working full time for hospitals rather than working through
temporary staffing agencies. Accordingly, when our clients request temporary
nurse staffing we must recruit from a smaller pool of available nurses, which
our competitors also recruit from. At this time we do not have enough nurses to
meet our clients' demands for our nurse staffing services. This shortage has
existed since approximately 2000. This shortage of nurses limits our ability to
grow our staffing business. Furthermore, we believe that the aging of the
existing nurse population and declining enrollments in nursing schools will
further exacerbate the existing nurse shortage. To remedy the shortage we have
6
increased advertising on our website and other industry visited websites to
attract new nurses to work for us. We also offer a variety of benefits to our
employees such as life insurance, medical and dental insurance, a 401 K plan, as
well as sign-on bonuses for new employees and recruitment bonuses for current
employees who refer new employees to us. In addition, we have recently started
recruiting nurses from foreign countries, including India and the Philippines.
THE COSTS OF ATTRACTING AND RETAINING QUALIFIED NURSES AND OTHER HEALTHCARE
PERSONNEL HAVE RISEN.
We compete with other healthcare staffing companies for qualified nurses and
other healthcare personnel. Because there is currently a shortage of qualified
healthcare personnel, competition for these employees is intense. To induce
healthcare personnel to sign on with them, our competitors have increased hourly
wages and other benefits. In response to such increases by our competitors, we
raised the wages and increased benefits that we offer to our personnel. Because
we were not able to pass the additional costs to certain clients, our margins
declined and we were forced to close 18 of our offices that could no longer
operate profitably.
WE OPERATE IN A HIGHLY COMPETITIVE MARKET AND OUR SUCCESS DEPENDS ON OUR ABILITY
TO REMAIN COMPETITIVE IN OBTAINING AND RETAINING HOSPITAL AND HEALTHCARE
FACILITY CLIENTS AND TEMPORARY HEALTHCARE PROFESSIONALS.
The temporary medical staffing business is highly competitive. We compete in
national, regional and local markets with full-service staffing companies and
with specialized temporary staffing agencies. Some of these companies have
greater marketing and financial resources than we do. Competition for hospital
and healthcare facility clients and temporary healthcare professionals may
increase in the future and, as a result, we may not be able to remain
competitive. To the extent competitors seek to gain or retain market share by
reducing prices or increasing marketing expenditures, we could lose revenues or
hospital and healthcare facility clients and our margins could decline, which
could seriously harm our operating results and cause the price of our stock to
decline. In addition, the development of alternative recruitment channels, such
as direct recruitment and other channels not involving staffing companies, could
lead our hospital and healthcare facility clients to bypass our services, which
would also cause our revenues and margins to decline.
OUR BUSINESS DEPENDS UPON OUR CONTINUED ABILITY TO SECURE NEW ORDERS FROM OUR
HOSPITAL AND HEALTHCARE FACILITY CLIENTS.
We do not have long-term agreements or exclusive guaranteed order contracts with
our hospital and healthcare facility clients. The success of our business
depends upon our ability to continually secure new orders from hospitals and
other healthcare facilities. Our hospital and healthcare facility clients are
free to place orders with our competitors and may choose to use temporary
healthcare professionals that our competitors offer. Therefore, we must maintain
positive relationships with our hospital and healthcare facility clients. If we
fail to maintain positive relationships with our hospital and healthcare
facility clients, we may be unable to generate new temporary healthcare
professional orders and our business may be adversely affected.
7
DECREASES IN PATIENT OCCUPANCY AT OUR CLIENTS' FACILITIES MAY ADVERSELY AFFECT
THE PROFITABILITY OF OUR BUSINESS.
Demand for our temporary healthcare staffing services is significantly affected
by the general level of patient occupancy at our clients' facilities. When a
hospital's occupancy increases, temporary employees are often added before
full-time employees are hired. As occupancy decreases, clients may reduce their
use of temporary employees before undertaking layoffs of their regular
employees. We also may experience more competitive pricing pressure during
periods of occupancy downturn. In addition, if a trend emerges toward providing
healthcare in alternative settings, as opposed to acute care hospitals,
occupancy at our clients' facilities could decline. This reduction in occupancy
could adversely affect the demand for our services and our profitability.
HEALTHCARE REFORM COULD NEGATIVELY IMPACT OUR BUSINESS OPPORTUNITIES, REVENUES
AND MARGINS.
The U.S. government has undertaken efforts to control increasing healthcare
costs through legislation, regulation and voluntary agreements with medical care
providers and drug companies. In the recent past, the U.S. Congress has
considered several comprehensive healthcare reform proposals. Some of these
proposals could have adversely affected our business. While the U.S. Congress
has not adopted any comprehensive reform proposals, members of Congress may
raise similar proposals in the future. If some of these proposals are approved,
hospitals and other healthcare facilities may react by spending less on
healthcare staffing, including nurses. If this were to occur, we would have
fewer business opportunities, which could seriously harm our business.
State governments have also attempted to control increasing healthcare costs.
For example, the state of Massachusetts has recently implemented a regulation
that limits the hourly rate payable to temporary nursing agencies for registered
nurses, licensed practical nurses and certified nurses' aides. The state of
Minnesota has also implemented a statute that limits the amount that nursing
agencies may charge nursing homes. Other states have also proposed legislation
that would limit the amounts that temporary staffing companies may charge. Any
such current or proposed laws could seriously harm our business, revenues and
margins.
Furthermore, third party payers, such as health maintenance organizations,
increasingly challenge the prices charged for medical care. Failure by hospitals
and other healthcare facilities to obtain full reimbursement from those third
party payers could reduce the demand for, or the price paid for our staffing
services.
WE ARE DEPENDENT ON THE PROPER FUNCTIONING OF OUR INFORMATION SYSTEMS.
Our Company is dependent on the proper functioning of our information systems in
operating our business. Critical information systems used in daily operations
identify and match staffing resources and client assignments and perform billing
and accounts receivable functions. Our information systems are protected through
physical and software safeguards and we have backup remote processing
capabilities. However, they are still vulnerable to fire, storm, flood, power
loss, telecommunications failures, physical or software break-ins and similar
events. In the event that critical information systems fail or are otherwise
unavailable, these functions would have to be accomplished manually, which could
temporarily impact our ability to identify business opportunities quickly, to
maintain billing and clinical records reliably and to bill for services
efficiently.
8
WE MAY BE LEGALLY LIABLE FOR DAMAGES RESULTING FROM OUR HOSPITAL AND HEALTHCARE
FACILITY CLIENTS' MISTREATMENT OF OUR HEALTHCARE PERSONNEL.
Because we are in the business of placing our temporary healthcare professionals
in the workplaces of other companies, we are subject to possible claims by our
temporary healthcare professionals alleging discrimination, sexual harassment,
negligence and other similar injuries caused by our hospital and healthcare
facility clients. The cost of defending such claims, even if groundless, could
be substantial and the associated negative publicity could adversely affect our
ability to attract and retain qualified healthcare professionals in the future.
IF STATE LICENSING REGULATIONS THAT APPLY TO US CHANGE, WE MAY FACE INCREASED
COSTS THAT REDUCE OUR REVENUE AND PROFITABILITY.
In some states, firms in the temporary healthcare staffing industry must be
registered to establish and advertise as a nurse staffing agency or must qualify
for an exemption from registration in those states. If we were to lose any
required state licenses, we would be required to cease operating in those
states. The introduction of new licensing regulations could substantially raise
the costs associated with hiring temporary employees. These increased costs may
not be able to be passed on to clients without a decrease in demand for
temporary employees, which would reduce our revenue and profitability.
FUTURE CHANGES IN REIMBURSEMENT TRENDS COULD HAMPER OUR CLIENTS' ABILITY TO PAY
US.
Many of our clients are reimbursed under the federal Medicare program and state
Medicaid programs for the services they provide. No portion of our revenue is
directly derived from Medicare and Medicaid programs. In recent years, federal
and state governments have made significant changes in these programs that have
reduced reimbursement rates. In addition, insurance companies and managed care
organizations seek to control costs by requiring that healthcare providers, such
as hospitals, discount their services in exchange for exclusive or preferred
participation in their benefit plans. Future federal and state legislation or
evolving commercial reimbursement trends may further reduce, or change
conditions for, our clients' reimbursement. Limitations on reimbursement could
reduce our clients' cash flows, hampering their ability to pay us.
COMPETITION FOR ACQUISITION OPPORTUNITIES MAY RESTRICT OUR FUTURE GROWTH BY
LIMITING OUR ABILITY TO MAKE ACQUISITIONS AT REASONABLE VALUATIONS.
Our business strategy includes increasing our market share and presence in the
temporary healthcare staffing industry through strategic acquisitions of
companies that complement or enhance our business. Between March 2001 and
February 2003, we acquired nine unaffiliated companies. These companies had an
aggregate of approximately $11.8 million in revenue at the time they were
purchased. We have not completed any acquisitions since February 2003. We have
historically faced competition for acquisitions. While to date such competition
has not affected our growth and expansion, in the future such competition could
limit our ability to grow by acquisitions or could raise the prices of
acquisitions and make them less attractive to us.
9
WE MAY FACE DIFFICULTIES INTEGRATING OUR ACQUISITIONS INTO OUR OPERATIONS AND
OUR ACQUISITIONS MAY BE UNSUCCESSFUL, INVOLVE SIGNIFICANT CASH EXPENDITURES OR
EXPOSE US TO UNFORESEEN LIABILITIES.
We continually evaluate opportunities to acquire healthcare staffing companies
and other human capital management services companies that complement or enhance
our business. From time to time, we engage in strategic acquisitions of such
companies or their assets.
While to date, we have generally not experienced problems, these acquisitions
involve numerous risks, including:
o potential loss of key employees or clients of acquired companies;
o difficulties integrating acquired personnel and distinct cultures into
our business;
o difficulties integrating acquired companies into our operating,
financial planning and financial reporting systems;
o diversion of management attention from existing operations; and
o assumption of liabilities and exposure to unforeseen liabilities of
acquired companies, including liabilities for their failure to comply
with healthcare regulations.
These acquisitions may also involve significant cash expenditures, debt
incurrence and integration expenses that could have a material adverse effect on
our financial condition and results of operations. Any acquisition may
ultimately have a negative impact on our business and financial condition.
Further, our revolving loan agreement with HFG Healthco-4 LLC requires that we
obtain the written consent of HFG Healthco-4 LLC before engaging in any
investing activities not in the ordinary course of business, including but not
limited to any mergers, consolidations and acquisitions. The restrictive
covenants of the revolving loan agreement with HFG Healthco-4 LLC may make it
difficult for us to expand our operations through acquisitions and other
investments if we are unable to obtain their consent.
Our January 2002 acquisition for $30.2 million of our AllCare Nursing business
did not produce the results we anticipated, resulting in our decision to sell
that business. In April 2005 we sold the AllCare Nursing business for
approximately $20.0 million.In addition, the Company recorded a goodwill
impairment of $3.8 million as of February 28, 2005. For a discussion of the
benefits we derived from the sale see " Recent Acquisitions and Dispositions"
above.
SIGNIFICANT LEGAL ACTIONS COULD SUBJECT US TO SUBSTANTIAL UNINSURED LIABILITIES.
We may be subject to claims related to torts or crimes committed by our
employees or temporary staffing personnel. Such claims could involve large
claims and significant defense costs. In some instances, we are required to
indemnify clients against some or all of these risks. A failure of any of our
employees or personnel to observe our policies and guidelines intended to reduce
these risks, relevant client policies and guidelines or applicable federal,
state or local laws, rules and regulations could result in negative publicity,
payment of fines or other damages. To protect ourselves from the cost of these
claims, we maintain professional malpractice liability insurance and general
liability insurance coverage in amounts and with deductibles that we believe are
adequate and appropriate for our operations. However, our insurance coverage may
not cover all claims against us or continue to be available to us at a
reasonable cost. If we are unable to maintain adequate insurance coverage, we
may be exposed to substantial liabilities, which could adversely affect our
financial results.
IF OUR INSURANCE COSTS INCREASE SIGNIFICANTLY, THESE INCREMENTAL COSTS COULD
NEGATIVELY AFFECT OUR FINANCIAL RESULTS.
The costs related to obtaining and maintaining workers compensation,
professional and general liability insurance and health insurance for healthcare
providers has been increasing as a percentage of revenue. Our cost of workers
10
compensation, professional and general liability and health insurance for
healthcare providers for the fiscal years ending February 28, 2005, 2004 and
2003 was $1.9 million, $2.8 million and $3.4 million, respectively. The
corresponding gross margin for the same time periods were 19.4.9%, 22.2% and
22.3%, respectively. If the cost of carrying this insurance continues to
increase significantly, we will recognize an associated increase in costs that
may negatively affect our margins. This could have an adverse impact on our
financial condition and the price of our common stock.
IF WE BECOME SUBJECT TO MATERIAL LIABILITIES UNDER OUR SELF-INSURED PROGRAMS,
OUR FINANCIAL RESULTS MAY BE ADVERSELY AFFECTED.
Except for a few states that require workers compensation through their state
fund, we provide workers compensation coverage through a program that is
partially self-insured. Zurich Insurance Company provides specific excess
reinsurance of $300,000 per occurrence as well as aggregate coverage for overall
claims borne by the group of companies that participate in the program. The
program also provides for risk sharing among members for infrequent, large
claims over $100,000. If we become subject to substantial uninsured workers
compensation liabilities, our financial results may be adversely affected.
WE HAVE A SUBSTANTIAL AMOUNT OF GOODWILL ON OUR BALANCE SHEET. A SUBSTANTIAL
IMPAIRMENT OF OUR GOODWILL MAY HAVE THE EFFECT OF DECREASING OUR EARNINGS OR
INCREASING OUR LOSSES.
As of February 28, 2005, we had $27.1 million of goodwill on our balance sheet,
of which $21.7 million was held for sale. The goodwill represents the excess of
the total purchase price of our acquisitions over the fair value of the net
assets acquired. At February 28, 2005, goodwill represented 44% of our total
assets and goodwill not held for sale represented 22% of the assets not held for
sale.
Historically, we amortized goodwill on a straight-line basis over the
estimated period of future benefit of up to 15 years. In July 2001, the
Financial Accounting Standards Board issued SFAS No. 141, Business Combinations,
and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires
that the purchase method of accounting be used for all business combinations
initiated after June 30, 2001, as well as all purchase method business
combinations completed after June 30, 2001. SFAS No. 142 requires that,
beginning on March 1, 2002, goodwill not be amortized, but rather that it be
reviewed annually for impairment. In the event impairment is identified, a
charge to earnings would be recorded. We have adopted the provisions of SFAS No.
141 and SFAS No. 142 as of March 1, 2002. Although it does not affect our cash
flow, an impairment charge to earnings has the effect of decreasing our
earnings. If we are required to take a charge to earnings for goodwill
impairment, our stock price could be adversely affected.
DEMAND FOR MEDICAL STAFFING SERVICES IS SIGNIFICANTLY AFFECTED BY THE GENERAL
LEVEL OF ECONOMIC ACTIVITY AND UNEMPLOYMENT IN THE UNITED STATES.
When economic activity increases, temporary employees are often added before
full-time employees are hired. However, as economic activity slows, many
companies, including our hospital and healthcare facility clients, reduce their
use of temporary employees before laying off full-time employees. In addition,
we may experience more competitive pricing pressure during periods of economic
downturn. Therefore, any significant economic downturn could have a material
adverse impact on our condition and results of operations.
11
OUR ABILITY TO BORROW UNDER OUR CREDIT FACILITY MAY BE LIMITED.
We have an asset-based revolving credit line with HFG Healthco-4 LLC that until
April 22, 2005 had a maximum borrowing amount of $35.0 million. As of February
28, 2005 and February 29, 2004 we had approximately $18.8 million and $22.7
million, respectively, outstanding under the revolving credit line (of which
$9.2 million and $12.2 million are held for sale respectively) with HFG
Healthco-4 LLC with additional borrowing capacity of $0.1 million and $0.0
million, respectively. On April 22, 2005 we sold our AllCare Nursing business
and applied approximately $13.0 million of the proceeds to repayment of our
credit line. In connection with the transaction, the maximum amount of the
credit line was reduced to $15.0 million and the credit line was extended until
April 2008. At that time approximately $7.1 million was outstanding and we had
additional borrowing capacity of $1.8 million. Our ability to borrow under the
credit facility is based upon, and thereby limited by, the amount of our
accounts receivable. Any material decline in our service revenues could reduce
our borrowing base, which could cause us to lose our ability to borrow
additional amounts under the credit facility. In such circumstances, the
borrowing availability under the credit facility may not be sufficient for our
capital needs.
WE HAVE A SIGNIFICANT WORKING CAPITAL DEFICIENCY BECAUSE OUR SENIOR DEBT IS
CLASSIFIED AS CURRENT
In April 2005 when we sold our AllCare Nursing business and extended our
revolving credit line, we agreed with our lender, HFG Healthco-4 LLC, to develop
new financial covenants to better reflect the Company after that sale. HFG
Healthco-4 LLC has agreed to waive all defaults of our old financial covenants
but is requiring that we agree to mutually acceptable new covenants by June 30,
2005. Although we believe we will finalize the new covenants by June 30, 2005,
we have not finalized the covenants as of the date of our financial statements.
Because HFG Healthco-4 LLC could call our facility if we are unable to reach
agreement, we have recorded our bank debt as a current liability in our
financial statements, resulting in a working capital deficiency as of February
28, 2005 of $8.2 million. We do not have sufficient capital to repay the line or
run our operations without a financing facility. There can be no assurance that
additional financing will be available if required, or, if available, will be
available on satisfactory terms.
THE POSSIBLE INABILITY TO ATTRACT AND RETAIN LICENSEES MAY ADVERSELY AFFECT OUR
BUSINESS.
Maintaining quality licensees, managers and branch administrators will play a
significant part in our future success. The possible inability to attract and
retain qualified licensees, skilled management and sufficient numbers of
credentialed health care professional and para-professionals and information
technology personnel could adversely affect our operations and quality of
service. Also, because the travel nurse program is dependent upon the attraction
of skilled nurses from overseas, such program could be adversely affected by
immigration restrictions limiting the number of such skilled personnel who may
enter and remain in the United States.
OUR SUCCESS DEPENDS ON THE CONTINUING SERVICE OF OUR SENIOR MANAGEMENT. IF ANY
MEMBER OF OUR SENIOR MANAGEMENT WERE TO LEAVE, THIS MAY HAVE A MATERIAL ADVERSE
EFFECT ON OUR OPERATING RESULTS AND FINANCIAL PERFORMANCE.
Changes in management could have an adverse effect on our business. We are
dependent upon the active participation of Messrs. David Savitsky, our Chief
Executive Officer, and Stephen Savitsky, our President. We have entered into
employment agreement with both of these individuals. While no member of our
senior management has any plans to retire or leave our company in the near
future, the failure to retain our current management could have a material
adverse effect on our operating results and financial performance. We do not
maintain any key life insurance policies for any of our executive officers or
other personnel.
OUR CERTIFICATE OF INCORPORATION AND BY-LAWS, AS AMENDED, CONTAIN CERTAIN
PROVISIONS THAT MAY PREVENT A CHANGE IN CONTROL OF OUR COMPANY IN SITUATIONS
WHEN SUCH A CHANGE IN CONTROL WOULD BE BENEFICIAL TO OUR SHAREHOLDERS, WHICH MAY
HAVE A MATERIAL ADVERSE EFFECT ON OUR FINANCIAL PERFORMANCE AND THE MARKET PRICE
OF OUR COMMON STOCK.
Our By-laws provide for a classified Board of Directors with staggered
three-year terms for directorships. Our By-laws also allow the Board of
Directors to increase Board membership without shareholder approval. Subject to
the rights of the holders of any series of preferred stock outstanding,
vacancies on the Board of Directors, including new vacancies created by an
increase in the authorized number of directors, may be filled by the affirmative
vote of a majority of the remaining directors without shareholder approval.
12
Further, subject to the rights of holders of any series of preferred stock
outstanding, directors may only be removed for cause and only by the affirmative
vote of the holders of at least 80% of the voting power of all of the shares of
capital stock entitled to vote for the election of directors. In addition, our
By-laws may be amended or repealed or new By-laws may be adopted by the Board
without shareholder approval and our shareholders may amend, repeal or adopt new
By-laws only upon the affirmative vote of 80% of the voting power of all of the
shares of capital stock entitled to vote for the election of directors. Each of
these provisions may allow our Board of Directors to entrench the current
members and may prevent a change in control of our company in situations when
such a change in control would be beneficial to our shareholders. Accordingly,
these provisions of our By-laws could have a material adverse effect on our
financial performance and on the market price of our common stock.
ITEM 2. PROPERTIES
The Company's business leases its administrative facilities in Lake Success, New
York. The Lake Success office lease for approximately 14,305 square feet of
office space expires in December 2010 provides for a current annual rent of
$0.39 million and is subject to a 3.5% annual rent escalation. The Company
believes that its administrative facilities are sufficient for its needs and
that it will be able to obtain additional space as needed.
There are currently 52 staffing offices in 33 states, of which 13 are operated
by the Company and 39 licensee staffing offices are operated by 31 licensees.
These offices are typically small administrative offices serving a limited
geographical area. The licensee offices are owned by licensees or are leased by
the licensee from third-party landlords. The Company believes that it will be
able to renew or find adequate replacement offices for all of the leases of the
staffing offices leased by it which are scheduled to expire within the next
twelve months at comparable costs to those currently being incurred.
ITEM 3. LEGAL PROCEEDINGS
The Company is subject to various claims and legal proceedings covering a wide
range of matters that arise in the ordinary course of business. Management and
legal counsel periodically review the probable outcome of such proceedings, the
costs and expenses reasonably expected to be incurred, and the availability and
the extent of insurance coverage and established reserves. While it is not
possible at this time to predict the outcome of these legal actions, in the
opinion of management, based on these reviews and the disposition of the
lawsuits, these matters should not have a material effect on the Company's
financial position, results of operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
13
PART II.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY,
RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
(A) Market Information
The Company has outstanding two classes of common equity securities: Class A
Common Stock and Class B Common Stock. In March 2002, the Company's Class A
Common Stock commenced trading on the American Stock Exchange under the symbol
"AHN".
The following table sets forth, the high and low sale prices for the Class A
Common Stock for each quarter during the two fiscal years ended February 28,
2005, as reported by the American Stock Exchange.
Fiscal Year ended February 29, 2004 High Low
- -------------------------------------------------------------------
1st quarter ended May 31, 2003 $0.90 $0.50
- -------------------------------------------------------------------
2nd quarter ended August 31, 2003 $1.15 $0.51
- -------------------------------------------------------------------
3rd quarter ended November 30, 2003 $1.01 $0.60
- -------------------------------------------------------------------
4th quarter ended February 28, 2004 $0.75 $0.46
- -------------------------------------------------------------------
Fiscal Year ended February 28, 2005 High Low
- -------------------------------------------------------------------
1st quarter ended May 31, 2004 $0.64 $0.50
- -------------------------------------------------------------------
2nd quarter ended August 31, 2004 $0.59 $0.25
- -------------------------------------------------------------------
3rd quarter ended November 30, 2004 $0.64 $0.41
- -------------------------------------------------------------------
4th quarter ended February 28, 2005 $0.52 $0.26
- -------------------------------------------------------------------
There is no established public trading market for the Company's Class B Common
Stock, which has ten votes per share and upon transfer is convertible
automatically into one share of Class A Common Stock, which has one vote per
share.
(B) Holders
As of February 28, 2005, there were approximately 271 holders of record of Class
A Common Stock (including brokerage firms holding stock in "street name" and
other nominees) and 361 holders of record of Class B Common Stock.
(C) Dividends
The Company has never paid any dividends on its shares of Class A or Class B
Common Stock. The Company does not expect to pay any dividends for the
foreseeable future as all earnings will be retained for use in its business.
14
(D) Securities Authorized for Issuance Under Equity Compensation Plans
Plan Category Number of Securities to Weighted-Average Number of Securities Remaining
be issued Exercise Available for
Upon Exercise of Price of Outstanding Future Issuance under Equity
Outstanding Options, Options, Compensation
Warrants and Rights (a) Warrants and Rights Plans (excluding securites
reflected in column (a))
- -----------------------------------------------------------------------------------------------------
Equity compensation
plans approved by
security holders 4,226,882 $0.59 2,039,235
- -----------------------------------------------------------------------------------------------------
Equity compensation
plans not approved
by
security holders (1) 400,000 $1.02 2,600,000
- -----------------------------------------------------------------------------------------------------
Total 4,626,882 $0.63 4,639,235
- -----------------------------------------------------------------------------------------------------
(1) During fiscal 2001, the Company adopted a stock option plan (the "2000 Stock
Option Plan") under which an aggregate of three million shares of common stock
are reserved for issuance. Both key employees and non-employee directors, except
for members of the compensation committee, are eligible to participate in the
2000 Stock Option Plan.
(E) Recent Sales of Unregistered Securities
The following is certain information concerning the sale by the Company of
securities which were not registered under the Securities Act of 1933 during the
fiscal year ended February 28, 2005. Those sales were made under the exemption
from registration contained in Section 4(2) of the Securities Act and Rule 152
of the Securities and Exchange Commission issued under that Section.
On April 19, 2004, we entered into a Standby Equity Distribution Agreement with
Cornell Capital Partners, L.P. Pursuant to the Standby Equity Distribution
Agreement, we may at our discretion, periodically sell to Cornell Capital
Partners shares of Common stock for a total purchase price of up to $5.0
million. For each share of common stock purchased under the Standby Equity
Distribution Agreement, Cornell Capital Partners pays up us 97% of the lowest
closing bid price of the common stock during the five consecutive trading days
immediately following the notice date. Further, we have agreed to pay Cornell
Capital Partners, L.P. 5% of the proceeds that we receive under the Standby
Equity Distribution Agreement.
On April 19, 2004 upon execution of the Standby Equity Distribution Agreement, a
Convertible Debenture in the principal amount of $0.14 million to Cornell
Capital Partners as a commitment fee. The Convertible Debenture has a term of
three years, accrues interest at 5% and is convertible into the Company's common
stock at a price per share of 100% of the lowest closing bid price for the three
days immediately preceding the conversion date. At February 28, 2005 $0.1
million was outstanding on the promissory note.
From time to time since November 2004 we have issued promissory notes to Cornell
Capital Partners to evidence loans made to us by Cornell Capital Partners, the
proceeds of which were used to fund our general working capital needs. It has
been contemplated that those Notes will be repaid from the proceeds of sales of
Class A Common Stock to Cornell Capital Partners under the Standby Equity
Distribution Agreement. During the fiscal year ended February 28, 2005, we
issued Cornell Capital Partners 1,682,104 shares under the Standby Equity
Distribution Agreement and the Convertible Debenture (of which 1,577,784 were
issued in the fourth quarter) for purchase prices between $0.27 and $0.41 per
share. The proceeds from the sales under the Standby Equity Distribution
Agreement were used to reduce our promissory note obligation to Cornell Capital
Partners.
15
In April 2004 the Company issued $0.5 million of Convertible Notes due April 2,
2005 and warrants to purchase 250,000 shares of Class A common stock at $0.75
per share. The Convertible Notes do not bear interest and are to be repaid in
Common Stock of the Company priced at the effective price at which Common Stock
or securities convertible into Common Stock of the Company was sold between
October 2, 2004 and April 2, 2005. The Company is in the process of issuing
Common Stock priced at $0.27 per share to repay the Notes.
On November 11, 2004 the Company issued a promissory note in the principal
amount of $0.4 million to Cornell Capital Partners, LP for a $0.4 million
advance against the Standby Equity Distribution Agreement. As was contemplated
the note was repaid through issuances of Class A Common stock to Cornell Capital
Partners under the Standby Equity Distribution Agreement. Proceeds from this
advance were used to fund general working capital needs.
On December 15, 2004 the Company sold a $1.5 million 15% Convertible
Subordinated Note to the wife of one of the Executive officers of the Company.
The Note bears interest at 15% per annum and matures on January 15, 2007. It is
to be repaid in eight equal installments commencing April 15 ,2005, subject to
restrictions on the sources of such payment. At the option of the holder, all or
a portion of the Note may be converted at any time, plus accrued but unpaid
interest, into shares of Class A Common Stock at a per share price equal to the
closing bid price of the Common Stock on the date of conversion
On February 18, 2005 the Company issued a Promissory Note to Cornell Capital
Partners L.P. in the principal amount of $0.82 million . As was contemplated,
the Note is to be repaid through issuances of Class A Common stock to Cornell
Capital Partners under the Standby Equity Distribution Agreement between the
Company and Cornell Captial Partners. At February 28, 2005 $0.76 million was
outstanding on the Promissory Note. Proceeds from this advance were used to fund
general working capital needs.
16
ITEM 6.
SELECTED FINANCIAL DATA (in thousands, except per share data)
The following table provides selected historical consolidated financial data of
the Company as of and for each of the fiscal years in the five year period ended
February 28, 2005 and reflects the results of operations and net assets of the
AllCare Nursing business as discontinued operations for the periods presented.
The data has been derived from the Company's audited financial statements and
related notes and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" which is contained in this report.
Feb 28, 2005 Feb 29, 2004 Feb 28, 2003 Feb 28, 2002 Feb 28, 2001
CONSOLIDATED OPERATIONS DATA:
(all amounts in thousands except per share data)
Revenues: $ 67,937 $ 81,210 $ 98,877 $ 94,482 $ 78,816
-----------------------------------------------------------------
(Loss) Income from continuing operations (8,459) (7,872) (5,010) 1,075 (2,994)
-----------------------------------------------------------------
(Loss) Income from discontinued operations (1,945) 1,692 2,177 2,518 1,928
-----------------------------------------------------------------
Net (loss) income $(10,404) $ (6,180) $ (2,833) $ 3,593 $ (1,066)
-----------------------------------------------------------------
(Loss) Income Earnings Per Share:
Loss from continuing operations:
(Loss) Income per common share Basic $ (0.34) $ (0.32) $ (0.21) $ 0.04 $ (0.13)
-----------------------------------------------------------------
(Loss) Income per common share Diluted $ (0.34) $ (0.32) $ (0.21) $ 0.04 $ (0.13)
-----------------------------------------------------------------
(Loss) Income from discontinued operations:
(Loss) Income per common share Basic $ (0.08) $ 0.07 $ 0.09 $ 0.11 $ 0.08
-----------------------------------------------------------------
(Loss) Income per common share Diluted $ (0.08) $ 0.07 $ 0.09 $ 0.11 $ 0.08
-----------------------------------------------------------------
Net (loss) income:
(Loss) Income per common share Basic $ (0.42) $ (0.25) $ (0.12) $ 0.15 $ (0.05)
-----------------------------------------------------------------
(Loss) Income per common share Diluted $ (0.42) $ (0.25) $ (0.12) $ 0.15 $ (0.05)
-----------------------------------------------------------------
Weighted Average common shares outstanding:
Basic 25,113 24,468 23,783 23,632 23,632
Diluted 25,113 24,468 23,783 23,632 23,632
CONSOLIDATED BALANCE SHEET DATA:
Total Assets $ 23,211 $29,195 $33,007 $27,831 $24,690
Long-term debt and other liabilities 19,181 20,320 22,363 20,206 10,068
Total Liabilities 30,590 31,029 32,437 27,041 19,858
Stockholders' equity (5,186) 5,053 10,546 13,220 9,627
Total Assets Held for Sale 37,098 45,532 45,608 47,498 16,741
Long-term debt and other non-current liabilities
held 21,108 35,424 34,799 31,650 10,991
for sale
Total Liabilities held for sale 33,768 37,578 36,411 36,747 11,946
Prior to the Company purchasing AllCare Nursing in January 2002, AllCare Nursing
was a Licensee of the Company for the twelve months ended February 28, 2002 and
for the Ten Months ended December 2001.
ATC Healthcare, Inc. did not pay any cash dividends on its common stock during
any of the periods set forth in the table above.
Amortization expense of $533 and $519, respectively, were included in fiscal
years 2002 and 2001 net income.
Fiscal 2002 included loss on extinguishment of debt of $854.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Management's discussion of results of operations below accounts for the sale of
the Company's AllCare Nursing business which occurred on April 22, 2005 as a
discontinued operation for the Fiscal years discussed.
Comparison of Year ended February 28, 2005 ("FISCAL 2005") to Year Ended
February 29, 2004 ("FISCAL 2004").
Revenues: In the fiscal year ended February 28, 2005, revenue declined 16.4% to
$67.9 million as compared to revenue for Fiscal 2004 of $81.2 million. For
fiscal year ended February 28, 2005 we opened one Company owned store and sold
nine new licensees as well as closed five Company owned stores as compared to
Fiscal 2004 when we opened two Company owned stores, sold two licensee and
closed ten Company owned stores. In addition, seven and eight licensees closed
for the year ended February 28, 2005 and February 29, 2004, respectively. Office
revenue for locations open during the last two fiscal years decreased $9.7
million due to the fact that demand for temporary nurses is going through a
period of contraction as hospitals continue to experience flat to declining
admission rates. We also closed 12 offices due to poor performance during Fiscal
2005. These offices accounted for $14.6 million in revenue during Fiscal 2004.
Until the demand for temporary nurses returns to prior levels we may continue to
see revenue decline in our existing businesses which would continue our trend of
losses. If revenues were to significantly decline our ability to continue
operations could be jeopardized. To offset the decline in per diem nursing, we
are actively recruiting new licensees as well as looking into other areas of
revenue generation such as Vendor on Premise and Pharmacy staffing.
Service Costs: Service costs were 80.6% of total revenues in Fiscal 2005 as
compared to 77.8% of total revenues in Fiscal 2004. The increase in service
costs can be attributed to the competitive environment that exist in the
industry which is pressuring fees that clients are willing to pay for services.
In addition, the rise in costs for malpractice and general liability insurance
has also caused an increase to our service costs. Service costs represent the
direct costs of providing services to patients or clients, including wages,
payroll taxes, travel costs, insurance costs, the cost of medical supplies and
the cost of contracted services.
General and Administrative Expenses: General and administrative expenses were
$17.0 million in Fiscal 2005 as compared to $19.2 million in Fiscal 2004.
General and administrative costs, expressed as a percentage of revenues, were
25.1% and 23.7% for Fiscal 2005 and Fiscal 2004 respectively. The reduction in
general and administrative expenses in Fiscal 2005 is the result of the
reduction in royalty payments to licensees due to decreased revenues as well as
initiatives undertaken by us to reduce the size of or close marginally
performing offices and a reduction of back office support staff.
Depreciation and Amortization: Depreciation and amortization expenses relating
to fixed assets and intangible assets was $0.7 million in fiscal 2005 as
compared to $1.4 million in fiscal 2004. The reduction in depreciation expense
is due to the write off of fixed assets in the prior year as well as certain
customer lists from acquisitions being fully amortized.
18
Office Closing and Restructuring Charge: For fiscal 2005 the Company recorded an
impairment to goodwill and other intangibles in the amount of $1.4 million. In
the third quarter of fiscal 2004 the Company recorded a charge associated with
the closing of certain offices in the amount of $2.6 million. The components of
the charges are as follows:
Components Amount (in thousands) Amount (in thousands)
- -------------------------------------------------------------------------------
Fiscal 2005 Fiscal 2004
- -------------------------------------------------------------------------------
Write-off of fixed assets - $ 892
- -------------------------------------------------------------------------------
Write-off of related goodwill $1,431 889
- -------------------------------------------------------------------------------
Severance costs and other
benefits - 608
- -------------------------------------------------------------------------------
Other - 200
- -------------------------------------------------------------------------------
Total Restructuring Charge $1,431 $2,589
- -------------------------------------------------------------------------------
Through February 28, 2005, the Company has paid $0.7 million of severance and
other costs associated with the office closings. As of February 28, 2005 the
Company's accounts payable and accrued expenses included $0.1 million of
remaining costs accrued, mainly for lease costs which will be paid through the
term of the related leases which expire at various dates through January 2007.
In the third quarter of fiscal 2005, the Company recorded a goodwill impairment
of $0.4 million and in the fourth quarter of fiscal 2005 the Company recorded a
goodwill impairment of $0.9 million and an impairment of other intangibles of
$0.1 million associated with offices closed during the year.
Interest Expense, net: Interest expense, net was $2.2 million and $1.9 million
in Fiscal 2005 and 2004 respectively. Interest expense increased $0.3 million in
Fiscal 2004 from Fiscal 2003 primarily due to interest costs associated with the
Company's term loan facility and to increased interest rates associated with its
revolving line of credit.
Other Income,net: Other income was $0.9 million during fiscal 2005 as compared
to $0.1 million in fiscal 2004. Other income in 2005 was generated by sale of
Licensee rights to new Licensees for approximately $0.5 million and the
settlement of various disputes with the Company's Atlanta Licensee for net
proceeds of approximately $0.4 million.
Provision Related to TLCS Guarantee: The Company is contingently liable on $2.3
million of obligations owed by TLCS which is payable over eight years. On
November 8, 2002, TLCS filed a petition for relief under Chapter 11 of the
United States Bankruptcy Code. As a result, the Company had recorded a provision
of $2.3 million representing the balance outstanding on the related TLCS
obligations. The Bankruptcy Court has approved the plan for concluding the TLCS
Bankruptcy. The plan provides for, among other things, that claims falling
within this guarantee should be paid in full. The assets of TLCS have been sold
by the bankruptcy court and the Company has been advised that the sale price is
sufficient to cover the claims of TLC creditors. The Company which is entitled
to be indemnified by TLCS if it has to pay any monies on the guarantee, has
filed claims for such indemnification in TLCS Bankruptcy case. Those claims have
not been disputed. Based on the above facts the Company and its legal counsel
have concluded that it is no longer probable that the Company will be liable for
any amounts under the guarantee and in November 2004 the Company reversed the
provision for such guarantee.
Provision (Benefit) for Income Taxes: For Fiscal 2005 the Company recorded an
expense for income taxes of $3.5 million on a pretax loss of $4.9 million. As
compared to recording an income tax expense of $0.9 million on a pretax loss of
$6.9 million in Fiscal 2004. The current provision provides for state and local
income taxes representing minimum taxes due to certain states as well as the
reduction in deferred taxes of $0.9 million that pertains to the reversal of the
TLC Guarantee and a $2.5 million valuation allowance.
For the year ended February 28, 2005, income tax expense is due primarily to the
change in the valuation allowance provided in that period. In the third quarter
of 2005, it became apparent that the hospital patient volumes were not returning
19
as anticipated and the Company would not return to profitable operations during
fiscal 2006 in addition in the fourth quarter of 2005 it became clear that the
Company would not have a gain on the sale of its All Care division. The Company
intends to maintain its valuation allowance until such time as positive evidence
exists to support reversal of the valuation allowance. Income tax expense
recorded in the future will be reduced to the extent of offsetting reductions in
the Company valuation allowance.
Discontinued Operations Assets held for Sale:
In December 2004, after reviewing the significant debt obligations of the
Company and the alternatives thereto, the Board of Directors of the Company
concluded and authorized the Company to sell its AllCare Nursing business.
On April 22, 2005, the Company sold substantially all of the assets of its
AllCare Nursing business, which consisted primarily of goodwill and accounts
receivable, to Onward Healthcare, Inc. ("Onward") of Norwalk, Connecticut, for
approximately $20.0 million in cash, of which $1.2 million was placed in escrow
pending the collection of the accounts receivable. AllCare Nursing was located
in Melville, New York, with offices in Union, New Jersey, and in Stratford,
Connecticut, and provided supplemental staffing and travel nurses to healthcare
facilities in the greater New York City metropolitan area, northern New Jersey,
and Connecticut.
The Company originally purchased AllCare Nursing, then known as Direct Staffing
Inc. and DSS Staffing Corp. (together "Direct Staffing"), in January 2002 for
$30.2 million in five percent interest-bearing promissory notes. The Company
used the funds which it received from Onward to retire approximately $13.0
million in bank debt and to repay and restructure the $28.1 million in
promissory notes outstanding to the sellers of Direct Staffing. In connection
with obtaining its lender's consent to the sale and paying down its bank debt,
the Company's revolving credit facility was permanently reduced from $35.0
million to $15.0 million. As a result of the repayment and restructuring of the
Direct Staffing promissory notes, those obligations were reduced from $28.1
million to $8.1 million.
AllCare Nursing had a loss from operations for the year ended February 28, 2005
of approximately $1.9 million which includes a goodwill impairment charge of
$3.8 million. This compares to income from operations of approximately $1.7
million for the year ended February 29, 2005. Net sales for All Care nursing
declined from $49.2 million in fiscal 2004 to $37.8 million for fiscal 2005 or
23.2%. The decrease was due to the decreased demand for nurses in the New York
metropolitan area.
Comparison of Year ended February 29, 2004 ("FISCAL 2004") to Year Ended
February 28, 2003 ("FISCAL 2003").
Revenues: In the fiscal year ended February 29, 2004, revenue declined 17.9% to
$81.2 million as compared to revenue for Fiscal 2003 of $98.9 million. For
fiscal year ended February 29, 2004 we opened two Company owned stores and sold
two licensees as well as closed ten Company owned stores as compared to Fiscal
2003 when we opened nine Company owned stores, sold one licensee and closed ten
Company owned stores. In addition, eight and six licensees closed for the year
ended February 29, 2004 and February 28, 2003, respectively. Office revenue for
locations open during the last two fiscal years decreased $9.7 million due to
the fact that demand for temporary nurses is going through a period of
contraction as hospitals continue to experience flat to declining admission
rates. We also closed 18 offices due to poor performance during Fiscal 2004.
These offices accounted for $14.7 million in revenue during Fiscal 2003.
20
Service Costs: Service costs were 77.8% of total revenues in Fiscal 2004 as
compared to 77.7% of total revenues in Fiscal 2003. The increase in service
costs as a percentage of revenue can be attributed to the decreased demand of
temporary nurses, which has increased the competitive environment pressuring
fees that clients are willing to pay for services. In addition, the rise in
costs for workers compensation, malpractice and general liability insurance has
also caused an increase to our service costs. Service costs represent the direct
costs of providing services to patients or clients, including wages, payroll
taxes, travel costs, insurance costs, the cost of medical supplies and the cost
of contracted services.
General and Administrative Expenses: General and administrative expenses were
$19.2 million in Fiscal 2004 as compared to $24.7 million in Fiscal 2003.
General and administrative costs, expressed as a percentage of revenues, were
23.7% and 25.0 % for Fiscal 2004 and Fiscal 2003 respectively. The reduction in
general and administrative expenses as a percentage of revenue in Fiscal 2004 is
the result of the reduction in royalty payments to licensees due to decreased
revenues as well as initiatives undertaken by us to reduce the size of or close
marginally performing offices and a reduction of back office support staff.
Depreciation and Amortization: Depreciation and amortization expenses relating
to fixed assets and intangible assets was $1.4 million in fiscal 2004 as
compared to $1.5 million in fiscal 2003.
Office Closing and Restructuring Charge: In the third quarter of fiscal 2004 the
Company recorded a charge associated with the closing of certain offices in the
amount of $2.6 million. The Company expects the restructure to result in a lower
overall cost structure to allow it to focus resources on offices with greater
potential for better overall growth and profitability. The components of the
charge are as follows:
Components Amount (in thousands)
- -------------------------------------------------------------
- -------------------------------------------------------------
Write-off of fixed assets $ 892
- -------------------------------------------------------------
Write-off of related goodwill 889
- -------------------------------------------------------------
Severance costs and other benefits 608
- -------------------------------------------------------------
Other 200
- -------------------------------------------------------------
Total Restructuring Charge $2,589
- -------------------------------------------------------------
As of February 29, 2004, the Company had paid $0.2 million for severance and
other costs associated with the office closings. As of February 29, 2004 the
Company's accounts payable and accrued expenses included $0.6 million of
remaining costs accrued mainly of severance and lease costs.
Interest Expense, net: Interest expense, net was $1.9 million and $1.1 million
in Fiscal 2004 and 2003 respectively. Interest expense increased $0.8 million in
Fiscal 2004 from Fiscal 2003 primarily due to interest costs associated with the
Company's term loan facility and to increased interest rates associated with its
revolving line of credit.
Provision Related to TLCS Guarantee: In Fiscal 2003, the Company recorded a
provision of $2.3 million related to the TLCS Guarantee. The Company is
contingently liable on $2.3 million of obligations owed by TLCS which is payable
over eight years. The Company is indemnified by TLCS for any obligations arising
out of these matters. On November 8, 2002, TLCS filed a petition for relief
under Chapter 11 of the United States Bankruptcy Code. The Company has not
received any demands for payment with respect to these obligations. The next
payment is due in September 2004. The Company believes that it has certain
defenses which could reduce or eliminate its recorded liability in this matter.
Provision (Benefit) for Income Taxes: In Fiscal 2004, the Company recorded an
expense for income taxes of $0.9 million on a pretax loss of $6.8 million. In
Fiscal 2003 the Company recorded an income tax benefit of $2.8 million on a
pretax net loss of $7.8 million.
21
For the year ended February 29, 2004 income tax expense is due primarily to the
change in the valuation allowance provided in that period. In the third quarter
of fiscal 2004, it became apparent that the hospital patient volumes were not
returning as anticipated and the Company would not return to profitable
operations in fiscal 2004. The Company intends to maintain its valuation
allowance until such time as positive evidence exists to support reversal of the
valuation allowance. Income tax expense recorded in the future will be reduced
to the extent of offsetting reductions in the Company valuation allowance. The
realization of the Company's remaining deferred tax assets is primarily
dependent on forecasted future taxable operating and non-operating income. Any
reduction in future forecasted taxable income may require that the Company
record an additional valuation against the deferred tax assets. An increase in
the valuation allowance would result in additional income tax expense in the
period the valuation was recorded and could have a significant impact on the
earnings of the Company. Management believes that it is more likely than not
that the Company's deferred tax assets which have not been reserved for will be
realized through future profitable operations.
Discontinued Operations Assets held for Sale:
As noted above in December 2004, after reviewing the significant debt
obligations of the Company and the alternatives thereto, the Board of Directors
of the Company concluded and authorized the Company to sell its AllCare Nursing
business.
On April 22, 2005, the Company sold substantially all of the assets of its
AllCare Nursing Services business, which consisted primarily of goodwill and
accounts receivable, to Onward Healthcare, Inc. ("Onward") of Norwalk,
Connecticut, for approximately $20.0 million in cash, of which $1.2 million was
placed in escrow pending the collection of the accounts receivable. AllCare
Nursing was located in Melville, New York, with offices in Union, New Jersey,
and in Stratford, Connecticut, and provided supplemental staffing and travel
nurses to healthcare facilities in the greater New York City metropolitan area,
northern New Jersey, and Connecticut.
The Company originally purchased AllCare Nursing, then known as Direct Staffing
Inc. and DSS Staffing Corp. (together "Direct Staffing"), in January 2002 for
$30.2 million in five percent interest-bearing promissory notes. The Company
used the funds which it received from Onward to retire approximately $13.0
million in bank debt and to repay and restructure the $28.1 million in
promissory notes outstanding to the sellers of Direct Staffing. In connection
with obtaining its lender's consent to the sale and paying down its bank debt,
the Company's revolving credit facility was permanently reduced from $35.0
million to $15.0 million. As a result of the repayment and restructuring of the
Direct Staffing promissory notes, those obligations were reduced from $28.1
million to $8.1 million.
All Care Nursing had income from operations for the year ended February 29, 2004
of approximately $1.7 million. This compares to income from operations of
approximately $2.2 million for the year ended February 28, 2003. Net sales for
All Care nursing was $49.2 million in fiscal 2004 as compared to $49.7 million
for fiscal 2003.
22
LIQUIDITY AND CAPITAL RESOURCES
The Company funds its cash needs through various equity and debt issuances and
through cash flow from operations. The Company generally pays its billable
employees weekly for their services, and remits certain statutory payroll and
related taxes as well as other fringe benefits. Invoices are generated to
reflect these costs plus the Company's markup.
Cash provided by operating activities was $3.5 million during the year ended
February 28, 2005 as compared to cash used in operating activities of $0.4
million and cash provided by operating activities of $0.5 million for the years
ended February 29, 2004 and February 28, 2003 respectively. Cash used in
investing activities was $0.1 million during the year ended February 28, 2005
compared to cash used in investing activities of $0.1 million and $2.4 million
during the year ended February 29, 2004 and February 28, 2003 respectively. Cash
used in financing activities was $2.9 million in Fiscal 2005 as compared to cash
provided by financing activities of $0.5 million and $1.2 million in Fiscal 2004
and 2003 respectively.
Cash provided in operating activities during Fiscal 2005 was mainly due to
collections on accounts receivable in the AllCare Nursing business due to a
decline in sales in that business. Cash used in investing activities during
Fiscal 2005 and 2004 was mainly used on capital expenditures. Cash used in
investing activities during Fiscal 2003 was primarily used for business
acquisitions. Cash used by financing activities in Fiscal 2005 was primarily
used to pay down the revolving credit facility with HFG Healthco-4LLC. Cash
provided by financing activities in Fiscal 2004 and 2003 was mainly from
borrowings under the Company credit facility and the sale of preferred and
common stock.
In April 2001, we obtained a new financing facility with HFG Healthco-4 LLC for
a $25 million, three-year term, revolving loan which expired in April 2004. The
$25 million revolving loan limit was increased to $27.5 million in October 2001.
Amounts borrowed under the $27.5 million revolving loan were used to repay $20.6
million of borrowing on our prior facility.
In November 2002, HFG Healthco-4 LLC, increased the revolving credit line to $35
million and provided for an additional term loan facility totaling $5 million.
Interest accrues at a rate of 3.95% over LIBOR on the revolving credit line and
6.37% over LIBOR on the term loan facility. The $35 million revolving loan
expires in November 2005. The term loan facility is for acquisitions and capital
expenditures. Repayment of this additional term facility is on a 36-month
straight-line amortization. The revolving credit line is subject to certain loan
covenants. These covenants include a debt service coverage ratio calculated by
taking the current portion of long term debt and interest paid and dividing by
four quarters of earnings before interest, taxes, depreciation and amortization;
consolidated net worth target calculated by taking total assets minus total
liabilities, earnings before interest, taxes, depreciation and amortization
target; current ratio calculated by taking current assets less current
liabilities; consolidated interest coverage ratio calculated by taking the most
recent four quarters of earnings before interest, taxes, depreciation and
amortization divided by four quarters of paid interest expense; and accounts
receivable turnover ratio.
In November 2002, the interest rates were revised to 4.55% over LIBOR on the
revolving line and 7.27% over the LIBOR on the term loan facility as part of a
loan modification.
On June 13, 2003, we received a waiver from HFG Healthco-4 LLC for
non-compliance of certain revolving loan covenants as of February 28, 2003.
Interest rates on both the revolving line and term loan facility were increased
2% and can decrease if we meet certain financial criteria. In addition, certain
financial ratio covenants were modified. The additional interest is not payable
until the current expiration date of the facility which is November 2005. As
part of this modification, the lender and noteholders, Direct Staffing, Inc. and
DSS Staffing Corp., amended the subordination agreement and the noteholders
amended the Notes issued to pay the purchase price. As a result of that
amendment, what had been two promissory notes issued to each of the former
owners of Direct Staffing, Inc. and DSS Staffing Corp. has been condensed into
one note. The note issued to one of the former owners is for a term of seven
23
years, with a minimum monthly payment (including interest) of $40,000 in year
one and minimum monthly payments of $80,000 in subsequent years, with a balloon
payment of $3,700,000 due in May 2007. The balance on that note after the
balloon payment is payable over the remaining 3 years of the note, subject to
certain limitations in the subordination agreement. The notes issued to the
other three former owners are for terms of ten years, with minimum monthly
payments (including interest) of $25,000 in the aggregate in the first year and
minimum monthly payments of $51,000 in the aggregate for the remaining years.
Any unpaid balance at the end of the note term will be due at that time.
Additional principal payments are payable to the noteholders if we achieve
certain financial ratios. In conjunction with this revision, one of the note
holders agreed to reduce his note by approximately $2,800,000 provided we do not
default under the notes or, in certain instances, our senior lending facility.
On January 8, 2004 an amendment to the $35 million revolving loan with HFG
Healthco-4 LLC was entered into modifying certain financial ratio covenants as
of November 30, 2003.
On May 24, 2004 an amendment to the $35 million revolving loan with HFG
Healthco-4 LLC was entered into modifying certain financial ratio covenants as
of February 29, 2004.
On July 15, 2004 an amendment to the $35 million revolving loan with HFG
Healthco-4 LLC was entered into modifying certain financial ratio covenants as
of May 31, 2004.
On October 13, 2004 an amendment to the $35 million revolving loan with HFG
Healthco-4 LLC was entered into modifying certain financial ratio covenants as
of August 31, 2004.
On January 14, 2005 an amendment to the $35 million revolving loan with HFG
Healthco-4 LLC was entered into modifying certain financial ratio covenants as
of November 30, 2004.
On April 22, 2005 an amendment to the $35 million revolving loan with HFG
Healthco-4LLC was entered into approving the sale of the Company's AllCare
Nursing business and related transactions. The amendment also reduced the
maximum amount of the revolving loan facility to $15 million, reduced
availability from 85% of receivables to 80% of receivables and extended the
facility's maturity date until April 2008.
The Company's had working capital deficiency of $8.7 million at February 28,
2005 compared to working capital of $19.6 million at February 29, 2004.
We anticipate that capital expenditures for furniture and equipment, including
improvements to our management information and operating systems during the next
twelve months will be approximately $0.3 million.
Operating cash flows have been our primary source of liquidity and historically
have been sufficient to fund our working capital, capital expenditures, and
internal business expansion and debt service. Our cash flow has been aided by
the use of funds from the Standby Equity Distribution Agreement with Cornell
Capital Partners, a loan to the Company by the wife of one of the executive
officers of the Company and by our sale of our All Care Nursing business. We
believe that our capital resources are sufficient to meet our working capital
requirements for the next twelve months. Our existing cash and cash equivalents
are not sufficient to sustain our operations for any length of time. We expect
to meet our future working capital, capital expenditure, internal business
expansion, and debt service from a combination of operating cash flows and funds
available under the $15 million revolving loan facility. We do not have enough
capital to operate the business without our revolving loan facility.
In April 2005 when we sold our AllCare Nursing business and extended our
revolving credit line, we agreed with our lender, HFG Healthco-4 LLC, to develop
new financial covenants to better reflect the Company after that sale. HFG
Healthco-4 LLC has agreed to waive all defaults of our old financial covenants
but is requiring that we agree to mutually acceptable new covenants by June 30,
2005. Although we believe we will finalize the new covenants by June 30, 2005,
we have not finalized the covenants as of the date of our financial statements.
Because HFG Healthco-4 LLC could call our facility if we are unable to reach
agreement, we have recorded our bank debt as a current liability in our
financial statements, resulting in a working capital deficiency as of February
28, 2005 of $8.2 million. We do not have sufficient capital to repay the line.
24
In addition, though we believe we will meet the new covenants once they are
established, it is possible if revenue continues to decline and we cannot reduce
our costs appropriately that we may violate the covenants. In the past when we
have violated covenants we have been able to receive a waiver or amendment of
those covenants from the lender HFG Healthco-4 LLC. It is expected that if we
violate a covenant we will be able to receive a waiver. If we are unable to
receive a waiver then we would be in default of our lending agreement. It is
likely that we will also use additional funds from the Standby Equity
Distribution Agreement with Cornell Capital Partners, as available. We do not
have sufficient capital to run our operations without a financing facility and
would have to look to alternative means such as the sale of stock or the sale of
certain assets to finance operations. There can be no assurance that additional
financing will be available if required, or, if available, will be available on
satisfactory terms.
On April 19, 2004, we entered into a Standby Equity Distribution Agreement with
Cornell Capital Partners, L.P. Pursuant to the Standby Equity Distribution
Agreement, we may, at our discretion, periodically sell to Cornell Capital
Partners shares of common stock for a total purchase price of up to $5,000,000.
For each share of common stock purchased under the Standby Equity Distribution
Agreement, Cornell Capital Partners will pay us 97% of the lowest closing bid
price of the common stock during the five consecutive trading days immediately
following the notice date. Further, we have agreed to pay Cornell Capital
Partners, L.P. 5% of the proceeds that we receive under the Standby Equity
Distribution Agreement. The Agreement is subject to us maintaining an effective
S-1 registration. In November 2004 the Securities and Exchange Commission
declared the Company's S-1 Effective. The Company has issued 1,682,104 shares to
Cornell Capital during fiscal 2005 at sales prices of $0.27 to $0.41 per share.
The Company received proceeds of $0.2 million net of expenses including
registration and closing costs of $0.4 million from the sale of these
securities. From time to time we have issued promissory notes to Cornell Capital
Partners to evidence loans made to us by Cornell Capital Partners, the proceeds
of which were used to fund our general working capital needs. The proceeds from
these sales under the Standby Equity Distribution Agreement were used to repay
the promissory notes due to Cornell Capital Partners.
INDEBTEDNESS AND CONTRACTUAL OBLIGATIONS OF THE COMPANY
The following are contractual cash obligations of the Company at February 28,
2005 adjusted for the completion of the Allcare Nursing business sale and
related payments and settlement of debt that occurred on April 22, 2005:
Payments due by period (amounts in thousands):
Less than 1-2 3-4
Total One Year Years Years Thereafter
- -------------------------------------------------------------------------------
Bank Financing $ 9,660 $ 9,660 $ - $ - $ -
Debt 11,168 2,319 749 0 8,100
Operating leases 3,444 1,005 1,472 967 463
----------------------------------------------------------
Total $ 24,272 $ 12,984 $ 2,221 $ 967 $ 8,563
- -------------------------------------------------------------------------------
BUSINESS TRENDS
Sales and margins have been under pressure as demand for temporary nurses is
currently going through a period of contraction. Hospitals are experiencing flat
to declining admission rates and are placing greater reliance on full-time staff
overtime and increased nurse patient loads. Because of difficult economic times,
nurses in many households are becoming the primary breadwinner, causing them to
seek more traditional full time employment. The U.S. Department of Health and
Human Services said in a July 2002 report that the national supply of full-time
equivalent registered nurses was estimated at 1.89 million and demand was
estimated at 2 million. The 6 percent gap between the supply of nurses and
vacancies in 2000 is expected to grow to 12 percent by 2010 and then to 20
percent five years later. As the gap between the supply of nurses and vacancies
grows, we believe that hospitals will reach out to offer nurses positions with
more flexible work schedules. Medical staffing companies can be the bridge
25
between these nurses and the hospitals to fashion fulltime jobs with unorthodox
work schedules. Additionally, the shortage will require hospitals to find nurses
from outside the United States. We are working with foreign recruiters to source
qualified nurses who want to work in the United States. It is our opinion that
as the economy rebounds, the prospects for the medical staffing industry should
improve as hospitals experience higher admission rates and increasing shortages
of healthcare workers.
CRITICAL ACCOUNTING POLICIES
Management's discussion in this Item 7 addresses the Company's consolidated
financial statements which have been prepared in accordance with accounting
principles generally accepted in the United States of America. The preparation
of these financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. On an on-going basis, management evaluates its estimates and
judgments, including those related to bad debts, intangible assets, income
taxes, workers' compensation, and contingencies and litigation. Management bases
its estimates and judgments on historical experience and on various other
factors that are believed to be reasonable under the circumstances. Actual
results may differ from these estimates under different assumptions or
conditions.
Management believes the following critical accounting policies, among others,
affect its more significant judgments and estimates used in the preparation of
its consolidated financial statements. The Company maintains allowances for
doubtful accounts for estimated losses resulting from the inability of its
customers to make required payments. If the financial condition of the Company's
customers were to deteriorate, resulting in an impairment of their ability to
make payments, additional allowances may be required. The Company determines a
need for a valuation allowance to reduce its deferred tax assets to the amount
that it believes is more likely than not to be realized. While the Company has
considered future taxable income and ongoing prudent and feasible tax planning
strategies in assessing the need for the valuation allowance, in the event the
Company were to determine that it would not be able to realize all or a part of
its net deferred tax assets in the future, an adjustment to the deferred tax
assets would be charged to income in the period such determination was made.
The Company believes the following are its most critical accounting policies in
that they are the most important to the portrayal of the Company's financial
condition and results of operations and require management's most difficult,
subjective or complex judgments.
Revenue Recognition
A substantial portion of the Company's service revenues are derived from a
unique form of franchising under which independent companies or contractors
("licensees") represent the Company within a designated territory. These
licensees assign Company personnel, including registered nurses and therapists,
to service clients using the Company's trade names and service marks. The
Company pays and distributes the payroll for the direct service personnel who
are all employees of the Company, administer all payroll withholdings and
payments, bill the customers and receive and process the accounts receivable.
The revenues and related direct costs are included in the Company's consolidated
service revenues and operating costs. The licensees are responsible for
providing an office and paying related expenses for administration, including
rent, utilities and costs for administrative personnel. The Company pays a
monthly distribution or commission to Company's domestic licensees based on a
defined formula of gross profit generated. Generally, the Company pays a
licensee approximately 55% (60% for certain licensees who have longer
relationships with us). There is no payment to the licensees based solely on
revenues. For Fiscal 2005, 2004 and 2003, total licensee distributions were
approximately $6,100, $6,900 and $9,100, respectively, and are included in the
general and administrative expenses.
Two of the Company's largest licensees, Direct Staffing, Inc. and DSS Staffing
Corp., were owned by one unrelated third party and by a son and two sons-in-law
of the Company's President and Chairman of the Board of Directors. Such
licensees were paid (gross licensee fees) approximately $6.5 million in Fiscal
2002.
26
The Company recognizes revenue as the related services are provided to customers
and when the customer is obligated to pay for such completed services. Employees
assigned to particular customers may be changed at the customer's request or at
the Company's initiation. A provision for uncollectible and doubtful accounts is
provided for amounts billed to customers which may ultimately be uncollectible
due to documentation disputes or the customer's inability to pay.
Allowance for Doubtful Accounts
The Company regularly monitors and assess its risk of not collecting amounts
owed to it by its customers. This evaluation is based upon an analysis of
amounts currently and past due along with relevant history and facts particular
to the customer. Based upon the results of this analysis, the Company records an
allowance for uncollectible accounts for this risk. This analysis requires the
Company to make significant estimates, and changes in facts and circumstances
could result in material changes in the allowance for doubtful accounts.
Goodwill Impairment
Goodwill represents the excess of purchase price over the fair value of
identifiable net assets of companies acquired. We adopted Statement of Financial
Accounting Standards No. 141, "Business Combinations," ("SFAS 141") and
Statement of Financial Accounting Standards No. 142, "Goodwill and Intangible
Assets," ("SFAS 142") as of March 1, 2002. SFAS 141 provides specific criteria
for the initial recognition and measurement of intangible assets apart from
goodwill. SFAS 142 requires that (1) goodwill and intangible assets with
indefinite useful lives should no longer be amortized, (2) goodwill and
intangibles must be reviewed for impairment annually (or more often if certain
events occur which could impact their carrying value), and (3) our operations be
formally identified into reporting units for the purpose of assessing
impairments of goodwill. Other definite lived intangibles, primarily customer
lists and non-compete agreements, are amortized on a straight line basis over
periods ranging from three to 10 years.
In accordance with SFAS 142 the Company tested goodwill impairment at the end of
the third and fourth quarters of Fiscal 2005 and 2004. The Company wrote off
$0.4 million of goodwill in the third quarter of 2005 and an additional $1.0
million of goodwill in the fourth quarter of 2005 associated with the closing of
offices which were acquired through acquisitions. In addition to those write
offs, the Company recorded a goodwill impairment of $3.8 million as of February
28, 2005, to discontinued operations which represents the difference in the
sales price of AllCare Nursing at February 28, 2005 and the value of the net
assets including goodwill which the Company had on its financial statements as
of that date. In Fiscal 2004 the Company wrote off $0.9 million of goodwill in
the third quarter of 2004 mainly associated with the closing of offices which
were acquired through acquisitions. The Company also performed its annual
testing for goodwill impairment in the fourth quarter of Fiscal 2004. When
performing this test, the Company reviewed the current operations of the ongoing
offices. In addition, The Company reviewed the anticipated cash flows of each
acquisition. The DSS and DSI operations represented approximately 73% of the
goodwill on the Company's financial statements under assets held for sale. The
remaining 27% of goodwill is made up of various acquisitions all of which have
continued to provide positive cash flow. The Company utilized the following
methodologies for evaluating impairment of goodwill: The income approach
discounted cash flow method, where the value of the subject investment is equal
to the present value of the cash flow streams that can be expected to be
generated by the Company in the future and the market approach merger and
acquisition method where the value of the subject investment is determined from
transactions involving mergers and acquisitions of comparable companies. Based
on the impairment testing, the Company determined that no additional write-off
of goodwill was required.
27
If management's expectations of future operating results change, or if there are
changes to other assumptions, the estimate of the fair value of our goodwill
could change significantly. Such change could result in additional goodwill
impairment charges in future periods, which could have a significant impact on
our consolidated financial statements.
Income Taxes
The Company accounts for income taxes in accordance with the Financial
Accounting Standards Board ("FASB") statement 109, Accounting for Income Taxes.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between financial statement carrying
amounts of existing assets and liabilities and their respective tax bases, and
net operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered. The Company records a valuation allowance against deferred tax assets
for which utilization of the asset is not likely.
Management's judgment is required in determining the realizability of the
deferred tax assets and liabilities and any valuation allowances recorded. The
realization of our remaining deferred tax assets is primarily dependent on
forecasted future taxable income.
Workers Compensation Reserves
Except for a few states that require workers compensation through their state
fund, the Company provides workers compensation coverage through a program that
is partially self-insured. Zurich Insurance Company provides excess reinsurance
for all claims over $300,000 per occurrence as well as aggregate coverage for
overall claims borne by the group of companies that participate in the program.
The program also provides for risk sharing among members for infrequent, large
claims over $100,000 but less then $300,000. The Company is responsible for all
claims under $100,000. The Company records its estimate of the ultimate cost of,
and reserve for, workers compensation and professional liability benefits based
on actuarial computations using the Company's loss history as well as industry
statistics. Furthermore, in determining its reserves, the Company includes
reserves for estimated claims incurred but not reported. The ultimate cost of
workers compensation will depend on actual costs incurred to settle the claims
and may differ from the amounts reserved by the Company for those claims.
Accruals for workers compensation claims are included in accrued expenses in the
consolidated balance sheets. A significant increase in claims or changes in laws
may require us to record additional expenses related to workers compensation. On
the other hand, significantly improved claim experience may result in lower
annual expense levels.
EFFECT OF INFLATION
The impact of inflation on the Company's sales and income from continuing
operations was immaterial during Fiscal 2004. In the past, the effects of
inflation on salaries and operating expenses have been offset by the Company's
ability to increase its charges for services rendered. The Company anticipates
that it will be able to continue to do so in the future. The Company continually
reviews its costs in relation to the pricing of its services.
28
RECENT ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities." This interpretation provides
guidance with respect to the consolidation of certain entities, referred to as
variable interest entities ("VIE"), in which an investor is subject to a
majority of the risk of loss from the VIE's activities, or is entitled to
receive a majority of the VIE's residual returns. This interpretation also
provides guidance with respect to the disclosure of VIEs in which an investor
maintains an interest, but is not required to consolidate. The provisions of the
interpretation are effective immediately for all VIEs created after January 31,
2003, or in which the Company obtains an interest after that date.
In October 2003, the FASB issued a revision to FIN 46, which among other things
deferred the effective date for certain variable interests. Application is
required for interest in special-purpose entities in the period ending after
December 15, 2003 and application is required for all other types of VIEs in the
period ending after March 15, 2004. The adoption of Fin 46 and FIN46R did not
have any impact on the Company's consolidated financial statements as of and for
the year ended February 28, 2005.
December 2004, the FASB issued SFAS No. 123 (revised 2004) "Share-Based Payment"
(SFAS 123R), which requires the measurement of all share-based payments to
employees, including grants of employee stock options, using a fair-value-based
method and the recording of such expense in an entity's statement of income. The
accounting provisions of SFAS 123R are effective for annual reporting periods
beginning after June 15, 2005. The Company is required to adopt the provisions
of SFAS 123R in the quarter ending May 31, 2006. The pro forma disclosures
previously permitted under SFAS 123 no longer will be an alternative to
financial statement recognition. Although the Company has not yet determined
whether the adoption of SFAS 123R will result in amounts that are similar to the
current pro forma disclosures under SFAS 123, the Company is evaluating the
requirements under SFAS 123R and expects the adoption to have a material impact
on the consolidated statements of operations and net income (loss) per share.
Management does not believe any other recently issued, but not yet effective,
accounting standards if currently adopted would have a material effect on the
accompanying financial statements,
FORWARD-LOOKING STATEMENTS
Certain statements in this Annual Report on Form 10-K constitute
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. From time to time, the Company also provides
forward-looking statements in other materials it releases to the public as well
as oral forward-looking statements. These statements are typically identified by
the inclusion of phrases such as "the Company anticipates", "the Company
believes" and other phrases of similar meaning. These forward looking statements
are based on the Company's current expectations. Such forward-lookingstatements
involve known and unknown risks, uncertainties, and other factors that may cause
the actual results, performance or achievements expressed or implied by such
forward-looking statements. The potential risks and uncertainties which would
cause actual results to differ materially from the Company's expectations
include, but are not limited to, those discussed in the section entitled
"Business - Risk Factors". Readers are cautioned not to place undue reliance on
these forward-looking statements, which reflect management's opinions only as of
the date hereof. The Company undertakes no obligation torevise or publicly
release the results of any revision to these forward-looking statements. Readers
should carefully review the risk factors described in other documents the
Company files from time to time with the Securities and Exchange Commission,
including Quarterly Reports on Form 10-Q to be filed by the Company in the
fiscal year 2005.
29
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Sensitivity: The Company's primary market risk exposure is
interest rate risk. The Company's exposure to market risk for changes in
interest rates relates to its debt obligations under its Credit Facility
described above. Under the Credit Facility, the weighted average interest rate
is 9.04% At February 28, 2005, drawings on the Facility were $18.8 million.
Assuming variable rate debt at February 28, 2005, a one point change in interest
rates would impact annual net interest payments by $188 thousand. The Company
does not use derivative financial instruments to manage interest rate risk.
30
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- -------------------------------------------
ATC HEALTHCARE, INC. AND SUBSIDIARIES
- -------------------------------------
INDEX
- -----
Page
----
Reports of Independent Registered Public Accounting Firms F-1
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheets
as of February 28, 2005 and February 29, 2004 F-3
Consolidated Statements of Operations
for the Fiscal Years ended February 28, 2005, February 29, 2004 and
February 28, 2003 F-4
Consolidated Statements of Stockholders' Equity (Deficiency)
for the Fiscal Years ended February 28, 2005, February 29, 2004 and
February 28, 2003 F-5
Consolidated Statements of Cash Flows
for the Fiscal Years ended February 28, 2005, February 29, 2004 and
February 28, 2003 F-6
Notes to Consolidated Financial Statements F-8
FINANCIAL STATEMENT SCHEDULE FOR THE FISCAL YEARS ENDED
February 28, 2005, February 29, 2004 and February 28, 2003
II - Valuation and Qualifying Accounts F-30
All other schedules were omitted because they are not required, not applicable
or the information is otherwise shown in the financial statements or the notes
thereto.
Report of Independent Registered Public Accounting Firm
-------------------------------------------------------
To the Board of Directors
ATC HEALTHCARE, INC.
We have audited the accompanying consolidated balance sheet of ATC Healthcare,
Inc. and Subsidiaries as of February 28, 2005 and February 29, 2004 and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of ATC Healthcare, Inc.
and Subsidiaries as of February 28, 2005 and February 29, 2004 and the results
of their operations and their cash flows for each of the years then ended, in
conformity with U.S. generally accepted accounting principles.
The information included on Schedule II is the responsibility of management, and
although not considered necessary for a fair presentation of financial position,
results of operations, and cash flows is presented for additional analysis and
has been subjected to the auditing procedures applied in the audit of the basic
consolidated financial statements. In our opinion, the information included on
Schedule II relating to the years ended February 28, 2005 and February 29, 2004
are fairly stated in all material respects, in relation to the basic
consolidated financial statements taken as a whole. Also, such schedule presents
fairly the information set forth therein in compliance with the applicable
accounting regulations of the Securities and Exchange Commission.
GOLDSTEIN GOLUB KESSLER LLP
New York, New York
May 7, 2005, except for the last paragraph of
Note 8(a) as to which the date is
June 8, 2005
F-1
Report of Independent Registered Public Accounting Firm
-------------------------------------------------------
To the Board of Directors and Stockholders of ATC Healthcare, Inc. and
Subsidiaries:
In our opinion, the consolidated financial statements for the year ended
February 28, 2003 listed in the accompanying index present fairly, in all
material respects, the results of operations, cash flows and changes in
stockholders' equity of ATC Healthcare, Inc. and Subsidiaries for the year then
ended, in conformity with accounting principles generally accepted in the United
States of America. In addition, in our opinion, the financial statement schedule
for the year ended February 28, 2003 listed in the accompanying index presents
fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audit. We
conducted our audit of these statements in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards
require that that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
Melville, New York
May 12, 2003, except for the fourth paragraph
of Note 8(a) as to which the date
is June 13, 2003
F-2
ATC HEALTHCARE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
- -------------------------------------------------------------------------------------------------------
February 28, February 29,
ASSETS 2005 2004
CURRENT ASSETS:
Cash and cash equivalents $ 1,042 $ 543
Accounts receivable, less allowance for doubtful accounts of
$464 and $276, respectively 10,022 11,260
Prepaid expenses and other current assets 4,416 4,689
Current assets held for sale 10,567 15,967
-----------------------------
Total current assets 26,047 32,459
Fixed assets, net 450 785
Intangibles 616 997
Goodwill 5,397 6,724
Deferred income taxes -- 3,477
Other assets 1,268 720
Non-current assets held for sale 26,531 29,565
-----------------------------
Total assets $ 60,309 $ 74,727
=============================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
CURRENT LIABILITIES:
Accounts payable $ 2,170 $ 1,460
Accrued expenses 5,431 6,282
Book overdraft 1,489 2,242
Current portion of notes and guarantee payable 2,814 725
Due under bank financing 9,660 --
Current liabilities held for sale 12,660 2,054
-----------------------------
Total current liabilities 34,224 12,763
Notes and guarantees payable 8,849 10,471
Due under bank financing - 9,478
Other liabilities 177 371
Non-current liabilities held for sale 21,108 35,524
-----------------------------
Total liabilities 64,358 68,607
-----------------------------
Commitments and contingencies
Convertible Series A Preferred Stock ($.01 par value 4,000 shares
authorized, 2,000 shares issued and outstanding at February 28,
2005 and February 29, 2004) 1,137 1,067
-----------------------------
STOCKHOLDERS' EQUITY (DEFICIENCY):
Class A Common Stock - $.01 par value; 75,000,000 shares authorized;
26,581,437 and 24,665,537 shares issued and outstanding at February
28, 2005 and February 29, 2004, respectively 266 247
Class B Common Stock - $.01 par value; 1,554,936 shares authorized;
190,417 and 245,617 shares issued and outstanding February 28, 2005
and February 29, 2004, respectively 2 3
Additional paid-in capital 14,638 14,421
Accumulated deficit (20,092) (9,618)
-----------------------------
Total stockholders' equity (deficiency) (5,186) 5,053
-----------------------------
Total liabilities and stockholders' equity (deficiency) $ 60,309 $ 74,727
=============================
- -----------------------------------------------------------------------------------------------------
See notes to consolidated financial statements
F-3
ATC HEALTHCARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
- -------------------------------------------------------------------------------------------------------------
For the Fiscal Years Ended
February 28, 2005 February 29, 2004 February 28, 2003
REVENUES:
Service revenues $ 67,937 $ 81,210 $ 98,877
----------------------------------------------------------
COSTS AND EXPENSES:
Service costs 54,732 63,205 76,785
General and administrative expenses 17,033 19,207 24,732
Depreciation and amortization 700 1,419 1,505
Office closing and restructuring charge 1,431 2,589 -
----------------------------------------------------------
Total operating expenses 73,896 86,420 103,022
----------------------------------------------------------
LOSS FROM OPERATIONS: (5,959) (5,210) (4,145)
----------------------------------------------------------
INTEREST AND OTHER EXPENSES (INCOME):
Interest expense, net 2,191 1,863 1,128
Other (income) expense, net (914) (139) 260
Provision (reversal) related to TLCS guarantee (2,293) - 2,293
----------------------------------------------------------
Total interest and other expenses (1,016) 1,724 3,681
----------------------------------------------------------
LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES (4,943) (6,934) (7,826)
----------------------------------------------------------
INCOME TAX PROVISION (BENEFIT) 3,516 938 (2,816)
----------------------------------------------------------
LOSS FROM CONTINUING OPERATIONS $ (8,459) $ (7,872) $ (5,010)
----------------------------------------------------------
DISCONTINUED OPERATIONS:
(Loss) Income from discontinued operations
net of tax (benefit) provision of ($1,452), $1,053,
and $1,372 in 2005, 2004, and 2003 respectively $ (1,945) $ 1,692 $ 2,177
----------------------------------------------------------
NET LOSS $ (10,404) $ (6,180) $ (2,833)
----------------------------------------------------------
DIVIDENDS ACCRETED 70 67 0
----------------------------------------------------------
NET LOSS AVAILABLE TO COMMON SHAREHOLDERS (10,474) (6,247) (2,833)
==========================================================
(Loss) Income Earnings Per Share:
Loss from continuing operations:
(Loss) per common share Basic $ (0.34) $ (0.32) $ (0.21)
----------------------------------------------------------
(Loss) per common share Diluted $ (0.34) $ (0.32) $ (0.21)
----------------------------------------------------------
(Loss) income from discontinued operations:
(Loss) income per common share Basic $ (0.08) $ 0.07 $ 0.09
----------------------------------------------------------
(Loss) income per common share Diluted $ (0.08) $ 0.07 $ 0.09
----------------------------------------------------------
Net (loss):
(Loss) per common share Basic $ (0.42) $ (0.25) $ (0.12)
----------------------------------------------------------
(Loss) per common share Diluted $ (0.42) $ (0.25) $ (0.12)
----------------------------------------------------------
Weighted Average common shares outstanding:
Basic 25,113 24,468 23,783
----------------------------------------------------------
Diluted 25,113 24,468 23,783
- ----------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements
F-4
ATC HEALTHCARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(IN THOUSANDS, EXCEPT SHARE DATA)
- --------------------------------------------------------------------------------------------------------------------------------
Class A Class B Additional
Common Stock Common Stock Paid-In Accumulated
Shares Amount Shares Amount Capital Deficit Total
- --------------------------------------------------------------------------------------------------------------------------------
Balances, February 28, 2002 23,368,943 $ 233 262,854 $ 3 $ 13,522 $ (538) $ 13,220
Exchange of Class B for Class A Common Stock 6,663 (6,663)
Exercise of employee stock options 103,333 1 51 52
Issuance of shares through Employee Stock
Purchase Plan 103,613 1 106 107
Net loss (2,833) (2,833)
------------------------------------------------------------------------------
Balances, February 28, 2003 23,582,552 235 256,191 3 13,679 (3,371) 10,546
Exchange of Class B for Class A Common Stock 10,774 - (10,774) - - - -
Exercise of employee stock options 56,500 1 - - 16 -- 17
Issuance of shares through Employee Stock
Purchase Plan 55,618 1 - - 35 -- 36
Common Stock issued for cash 960,093 10 - 691 701
Accrued dividends on Preferred stock (67) (67)
Net loss -- -- -- -- -- (6,180) (6,180)
------------------------------------------------------------------------------
Balances, February 29, 2004 24,665,537 247 245,417 3 14,421 (9,618) 5,053
Exchange of Class B for Class A Common Stock 55,000 1 (55,000) (1) - - -
Issuance of shares through Employee Stock
Purchase Plan 13,796 1 - - 8 - 9
Sale of Common Stock net of issuance costs
of $358 1,682,104 16 - - 160 176
Common stock issued for services 165,000 1 - - 49 50
Accrued dividends on Preferred Stock - - - - - (70) (70)
Net loss - - - - - (10,404) (10,404)
------------------------------------------------------------------------------
Balances, February 28, 2005 26,581,437 $ 266 190,417 $ 2 $ 14,638 $ (20,092) $ (5,186)
==============================================================================
See notes to consolidated financial statements
F-5
ATC HEALTHCARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
- ------------------------------------------------------------------------------------------------------------------------
For the Fiscal Years Ended
February 29, February 28, February 28,
2005 2004 2003
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (10,404) $ (6,180) $ (2,833)
Income (Loss) on discontinued operations $ (1,945) $ 1,692 $ 2,177
------------------------------------------------
Net loss on continuing operations $ (8,459) $ (7,872) $ (5,010)
Adjustments to reconcile net loss to net cash provided by
(used in) operations:
Depreciation and amortization 700 1,419 1,429
Amortization of debt financing costs 284 267 256
Amortization of discount on convertible debenture 40
Provision for doubtful accounts 188 (543) 105
Provision (reversal) related to TLCS Guarantee (2,293) - 2,293
Deferred Income Taxes 3,477 838 (2,956)
Write off of Fixed Assets 892
Loss On Write off of Deferred Financial Costs 44
Impairment of Goodwill 1,431 889
Changes in operating assets and liabilities, net of effects of
acquisitions:
Accounts receivable 1,050 2,257 325
Prepaid expenses and other current assets 323 (1,602) (2,714)
Other assets (765) (34) 108
Accounts payable and accrued expenses (140) 1,075 172
Other long-term liabilities (330) 293 (14)
Net cash provided by discontinued operations 8,021 1,742 6,441
------------------------------------------------
Net cash (used in) provided by operating
activites 3,527 (379) 479
------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (77) (243) (417)
Acquisition of businesses 150 (2,071)
Issuance of notes receivable (33)
Other 108
Net cash used in discontinued operations (20)
------------------------------------------------
Net cash used in investing activities (77) (113) (2,413)
------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of borrowings of notes and capital lease obligation 767 (3,851) (2,815)
Repayment of term loan facility (1,568) (1,363) (87)
Issuance of Notes Payable 1,500
(Decrease) Increase in book overdraft (753) (338) 2,580
Debt Financing Costs (67) (87) (520)
Issuance of common and preferred stock, net of issuance costs
of $358 185 1,157 758
Borrowings under new credit facility 800 1,838 1,416
Issuance of Convertible Notes and Warrants 590
Net cash provided by (used in) discontinued operations (4,405) 3,094 (133)
------------------------------------------------
Net cash (used in) provided by financing
activities (2,951) 450 1,199
------------------------------------------------
NET INCREASE (DECREASE) IN CASH 499 (42) (735)
CASH, BEGINNING OF YEAR 543 585 1,320
------------------------------------------------
CASH, END OF YEAR $ 1,042 $ 543 $ 585
- ------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements
F-6
ATC HEALTHCARE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
(CONTINUED)
- ---------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA:
Supplemental disclosure of cash flow information:
Interest Paid $ 2,844 $ 2,490 $ 2,081
Taxes Paid $ 100 $ 43 $ 71
Supplemental schedule of noncash investing and financing activities:
Fair value of assets acquired $ - $ - $ 3,041
Notes issued in connection with acquisition of businesses $ - $ - 970
-----------------------------------------
Net cash paid $ - $ - $ 2,071
=========================================
Shares issued for future services $ 50 $ - $ -
Fixed assets acquired through capital leases $ - $ - $ 97
Dividends $ 70 $ 67 $ -
- ---------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements
F-7
ATC HEALTHCARE, INC. AND SUBSIDIARIES
- -------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands, Except Per Share Amounts)
1. Organization and Basis of Presentation
ATC Healthcare, Inc. and Subsidiaries, including ATC Healthcare Services, Inc.
and ATC Staffing Services, Inc., (collectively, the "Company"), are providers of
supplemental staffing to healthcare facilities. In August 2001, the Company
changed its name from Staff Builders, Inc. to ATC Healthcare, Inc. The Company
offers a skills list of qualified health care associates in over 60 job
categories ranging from the highest level of specialty nurse, including critical
care, neonatal and labor and delivery, to medical administrative staff,
including third party billers, administrative assistants, claims processors,
collection personnel and medical records clerks. The nurses provided to clients
include registered nurses, licensed practical nurses and certified nursing
assistants.
Subsequent to year end the Company sold its ALLCare Nursing business but has not
had sufficient time to negotiate new financial covenants on its revolving line
of credit with the Lender HFG Healthco4-LLC (see Note 8(a)). The Company is not
able to meet the existing financial covenants under the revolving line of
credit. As a result the debt associated with the revolving line of credit has
been classified as short term resulting in a working capital deficiency of
$8,177. The lending institution has not called the loan and is in process of
renegotiating those covenants with the Company. In addition the Company has
shown losses from operations for the past three years as well having a net
stockholders deficiency
On April 22, 2005, the Company sold substantially all of the assets and
liabilities of its AllCare Nursing services business, which consisted primarily
of goodwill and accounts receivable, to Onward Healthcare, Inc. ("Onward") see
Note 3 (Acquisitions and Dispositions). Accordingly, the Company's Financial
Statements reflect the related assets and liabilities of operations as Assets
and Liabilities Held For Sale in the accompanying balance sheets and
Discontinued Operations in the accompanying statement of operations presented.
2. Summary of Significant Accounting Policies
Consolidation
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries after the elimination of all significant
intercompany balances and transactions and include the results of operations of
purchased businesses from the respective dates of acquisition.
Revenue Recognition
A substantial portion of the Company's service revenues is derived from a unique
form of franchising under which independent companies or contractors
("licensees") represent the Company within a designated territory. These
licensees assign Company personnel, including registered nurses and therapists,
to service clients using the Company's trade names and service marks. The
Company pays and distributes the payroll for the direct service personnel who
are all employees of the Company, administers all payroll withholdings and
payments, bills the customers and receives and processes the accounts
receivable. The revenues and related direct costs are included in the Company's
consolidated service revenues and operating costs. The licensees are responsible
for providing an office and paying related expenses for administration,
including rent, utilities and costs for administrative personnel.
F-8
Revenue Recognition (Continued)
The Company pays a monthly distribution or commission to its domestic licensees
based on a defined formula of gross profit generated. Generally, the Company
pays a licensee approximately 55% of gross profit (60% for certain licensees who
have longer relationships with the Company). There is no payment to the
licensees based solely on revenues. For Fiscal 2005, 2004 and 2003, total
licensee staffing distributions net of discontinued operations were
approximately $6,000, $6,600 and $9,000 respectively, and are included in
general and administrative expenses.
The Company recognizes revenue as the related services are provided to customers
and when the customer is obligated to pay for such completed services. The
Company bills its customers an hourly rate for the services performed by our
nurses on a weekly basis. Terms of payment are net 30 days. Employees assigned
to particular customers may be changed at the customer's request or at the
Company's initiation. A provision for uncollectible and doubtful accounts is
provided for amounts billed to customers which may ultimately be uncollectible
due to documentation disputes or the customer's inability to pay.
Revenues generated from the sales of licenses and initial licensee fees are
recognized upon signing of the license agreement, if collectibility of such
amounts is reasonably assured, since the Company has performed substantially all
of its obligations under its licensee agreements by such date. In circumstances
where a reasonable basis does not exist for estimating collectibility of the
proceeds of the sales of licensees and initial license fees, such amounts are
deferred and recognized as collections are made, or until such time that
collectibility is reasonably assured. The Company does not have recurring fees
from its licensees. The Company recorded revenue from licensee fees of $935,
$448 and $1,200 for fiscal 2005, 2004 and 2003 respectively.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, revenues and expenses as well as the disclosure of contingent
assets and liabilities in the consolidated financial statements. Actual results
could differ from those estimates. The most significant estimates relate to the
collectibility of accounts receivable, obligations under workers' compensation
and valuation allowances on deferred taxes.
Cash and Cash Equivalents
Cash and cash equivalents include liquid investments with original maturities of
three months or less.
Concentrations of Credit Risk
Concentrations of credit risk with respect to trade accounts receivable are
limited due to the large number of customers and their dispersion across a
number of geographic areas. However, essentially all trade receivables are
concentrated in the hospital and healthcare sectors in the United States and,
accordingly, the Company is exposed to their respective business, economic and
location-specific variables. Although the Company does not currently foresee a
concentrated credit risk associated with these receivables, repayment is
dependent upon the financial stability of these industry sectors.
Fixed Assets
Fixed assets, consisting of equipment (primarily computer hardware and
software), furniture and fixtures, and leasehold improvements, are stated at
cost and depreciated from the date placed into service over the estimated useful
lives of the assets using the straight-line method. Leasehold improvements are
amortized over the shorter of the lease term or estimated useful life of the
improvement. Maintenance and repairs are charged to expense as incurred;
renewals and improvements which extend the life of the asset are capitalized.
Gains or losses from the disposition of fixed assets are reflected in operating
results.
F-9
Impairment of Long-lived Assets
In accordance with Statement of Financial Accounting Standards Board ("SFAS")
No. 144, ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS,
long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable. The
Company periodically reviews its fixed assets to determine if any impairment
exists based upon projected, undiscounted net cash flows of the Company. As of
February 28, 2005 the Company believes that no impairment of long-lived assets
exists. During fiscal 2004, the Company charged operations $892 for fixed assets
that were impaired.
Goodwill and Intangible Assets
Goodwill represents the excess of purchase price over the fair value of
identifiable net assets of companies acquired. The Company adopted SFAS No. 141,
BUSINESS COMBINATIONS, ("SFAS 141") and SFAS No. 142, GOODWILL AND INTANGIBLE
ASSETS, ("SFAS 142") as of March 1, 2002. SFAS 141 provides specific criteria
for the initial recognition and measurement of intangible assets apart from
goodwill. SFAS 142 requires that (1) goodwill and intangible assets with
indefinite useful lives should no longer be amortized, (2) goodwill and
intangibles must be reviewed for impairment annually (or more often if certain
events occur which could impact their carrying value), and (3) the Company's
operations be formally identified into reporting units for the purpose of
assessing impairments of goodwill. Prior to 2002, goodwill was amortized on a
straight-line basis over 15 years. Other definite lived intangibles, primarily
customer lists and non-compete agreements, are amortized on a straight-line
basis over periods ranging from three to 10 years.
In accordance with SFAS 142, the Company performed a transitional impairment
test as of March 1, 2002 and its annual impairment test at the end of each year
for its unamortized goodwill. As a result of the impairment tests performed, the
Company charged operations $5,274 (of which $3,843 pertains to discontinued
operations) and $889 for the years ended February 28, 2005 and February 29, 2004
respectively ,for goodwill and intangibles the Company determined was impaired.
No other impairment was noted at the date of the adoption of SFAS 142 or at
February 28, 2005, February 29, 2004 and February 28, 2003. During fiscal 2005,
the Company's net goodwill decreased by $5,172 and the Company's net intangibles
decreased by $102 as a result of impairment charges. During fiscal 2004, the
Company's net goodwill decreased by $1,193 as a result of an impairment charge
of $889 and $304 of final purchase price allocations.
Goodwill and other intangibles are as follows:
- ------------------------------------------------------------------------------------------------------------------------------
Goodwill and other Intangibles
- ------------------------------------------------------------------------------------------------------------------------------
February 28, 2005 February 29, 2004
- ------------------------------------------------------------------------------------------------------------------------------
Gross Carrying Accumulated Gross Carrying Accumulated Amortization
Amount Amortization Amount Amortization Period
------ ------------ ------ ------------ ------
Goodwill $ 5,397 $ - $ 6,724 $ - none
Covenants not to compete 500 235 600 221 10
Other intangibles 674 323 844 226 3-10
-------------------------------------------------------------------
Subtotal 6,571 558 8,168 447 3-10
Included in assets held for sale 28,415 1,965 32,258 1,300 5-10
-------------------------------------------------------------------
$ 34,986 $ 2,523 $ 40,426 $ 1,747
===================================================================
Included in assets held for sale at February 28, 2005 and 2004 is $21,689 and
$25,532 respectively of Goodwill.
Amortization expense was $279, $273 and $157 for fiscal years 2005, 2004 and
2003, respectively. Amortization in assets held for sale was $665, $665, and
$505 for fiscal years 2005, 2004 and 2003, respectively.
F-10
Goodwill and Intangible Assets (Continued)
Estimated amortization expense for the next four fiscal years is as follows:
------------------------------
Amortization Expense
------------------------------
2006 $ 203
2007 203
2008 145
2009 65
Insurance Costs
The Company is obligated for certain costs under various insurance programs,
including workers' compensation. The Company recognizes its obligations
associated with these policies in the period the claim is incurred. The Company
records an estimate of the ultimate cost of, and reserve for, workers
compensation based on actuarial computations using the Company's loss history as
well as industry statistics. Zurich Insurance Company provides excess
reinsurance for all claims over $300,000 per occurrence as well as aggregate
coverage for overall claims borne by the group of companies that participate in
the program. The program also provides for risk sharing among members for
infrequent, large claims over $100,000 but less then $300,000. The Company is
responsible for all claims under $100,000. Furthermore, in determining reserves,
the Company includes reserves for estimated claims incurred but not reported.
Such estimates and the resulting reserves are reviewed and updated periodically,
and any adjustments resulting there from are reflected in earnings currently.
Office Closings and Restructure Charges
For fiscal 2005 the Company recorded a goodwill impairment in the amount of
$1,431 excluding the write off which resulted form the sale of the AllCare
Nursing business, discussed in note 3. In the third quarter of fiscal 2004 the
Company recorded a charge associated with the closing of certain offices in the
amount of $2,589. The components of the charges are as follows:
Components February 28, 2005 February 29, 2004
- --------------------------------------- ---------------------------------------- ----------------------------------------
Write-off of fixed assets $ 892
Write-off of related goodwill $1,431 889
Severance costs and other benefits
608
Other exit costs 200
---
Total restructuring charge $1,431 $2,589
Through February 28, 2005, the Company has paid $707 of severance and other
costs associated with the office closings. As of February 28, 2005, the
Company's accounts payable and accrued expenses included $101 of remaining costs
accrued consisting mainly of severance and lease costs. The remaining lease
costs will be paid through the term of the related leases that expire through
January 2007.
Income Taxes
The Company uses the asset and liability method of accounting for income taxes.
Under the asset and liability method, deferred tax assets and liabilities are
recognized for the estimated future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets are reduced by a
valuation allowance when, in the opinion of management, it is more likely than
not that some portion or all of the deferred tax assets will not be realized.
F-11
Earnings (Loss) Per Share
Basic earnings (loss) per share is computed using the weighted average number of
common shares outstanding for the applicable period. Diluted earnings (loss) per
share is computed using the weighted average number of common shares plus
potential common shares outstanding, unless the inclusion of such potential
common equivalent shares would be anti-dilutive. In Fiscal 2005, 2004 and 2003,
9,734, 6,002 and 5,946 common stock equivalents, respectively, have been
excluded from the earnings per share calculation, as their inclusion would have
been anti-dilutive.
Fair Value of Financial Instruments
The carrying amount of cash and cash equivalents, accounts receivable, accounts
payable, amounts due under bank financing and acquisition notes payable
approximate fair value.
Advertising
Advertising costs, which are expensed as incurred, were $500, $571 and $1,088 in
Fiscal 2005, 2004 and 2003, respectively, and are included in general and
administrative expenses.
Stock-Based Compensation
The Company applies the intrinsic value method in accounting for its stock-based
compensation. Had the Company measured compensation under the fair value method
for stock options granted, the Company's net loss and net loss per share, basic
and diluted, would have been as follows:
Fiscal Year Ended
February 28, 2005 February 29, 2004 February 28, 2003
Net loss, as reported $ (10,404) $ (6,180) $ (2,833)
Less: Fair value method of stock-based compensation,
net of tax (1,014) (384) (59)
---------------------------------------------------------------
Net loss, pro forma $ (11,418) $ (6,564) $ (2,892)
===============================================================
Basic net loss per share as reported $ (0.42) $ (0.25) $ (0.12)
Proforma basic net loss income per share $ (0.45) $ (0.27) $ (0.12)
Diluted net loss per share as reported $ (0.42) $ (0.25) $ (0.12)
Proforma diluted net loss income per share $ (0.45) $ (0.27) $ (0.12)
- ---------------------------------------------------------------------------------------------------------------------------
The fair value of each option grant was estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions used for
grants in Fiscal 2004 and 2003, respectively. Risk-free interest rates of 4.4%
and 4.7%; dividend yield of 0% for each year; expected lives of 10 years for
each year and volatility of 96%, and 96%. There was no issuance of stock options
during Fiscal 2005.
F-12
Recent Accounting Pronouncements
In May 2003, the FASB issued SFAS No. 150, ACCOUNTING FOR CERTAIN FINANCIAL
INSTRUMENTS WITH CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY. This statement
establishes standards for how an issuer classifies and measures in its statement
of financial position, certain financial instruments with characteristics of
both liabilities and equity. In accordance with the statement, financial
instruments that embody obligations for the issuer are required to be classified
as liabilities. This Statement shall be effective for financial instruments
entered into or modified after May 31, 2003, and otherwise shall be effective at
the beginning of the first interim period beginning after June 15, 2003. The
adoption of SFAS 150 has no impact on the consolidated financial statements of
the Company.
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities." This interpretation provides
guidance with respect to the consolidation of certain entities, referred to as
variable interest entities ("VIE"), in which an investor is subject to a
majority of the risk of loss from the VIE's activities, or is entitled to
receive a majority of the VIE's residual returns. This interpretation also
provides guidance with respect to the disclosure of VIEs in which an investor
maintains an interest, but is not required to consolidate. The provisions of the
interpretation are effective immediately for all VIEs created after January 31,
2003, or in which the Company obtains an interest after that date.
In October 2003, the FASB issued a revision to FIN 46, which among other things
deferred the effective date for certain variable interests. Application is
required for interest in special-purpose entities in the period ending after
December 15, 2003 and application is required for all other types of VIEs in the
period ending after March 15, 2004. The adoption of FIN 46 and FIN46R did not
have any impact on the Company's consolidated financial statements as of and for
the year ended February 28, 2005.
In December 2004, the FASB issued SFAS No. 123 (revised 2004) "Share-Based
Payment" (SFAS 123R), which requires the measurement of all share-based payments
to employees, including grants of employee stock options, using a
fair-value-based method and the recording of such expense in an entity's
statement of income. The accounting provisions of SFAS 123R are effective for
annual reporting periods beginning after June 15, 2005. The Company is required
to adopt the provisions of SFAS 123R in the quarter ending May 31, 2006. The pro
forma disclosures previously permitted under SFAS 123 no longer will be an
alternative to financial statement recognition. Although the Company has not yet
determined whether the adoption of SFAS 123R will result in amounts that are
similar to the current pro forma disclosures under SFAS 123, the Company is
evaluating the requirements under SFAS 123R and expects the adoption to have a
material impact on the consolidated statements of operations and net income
(loss) per share.
Management does not believe any other recently issued, but not yet effective,
accounting standards if currently adopted would have a material effect on the
accompanying financial statements.
3. Acquisitions
In June 2002, the Company bought out a management contract with a company
("Travel Company") which was managing its travel nurse division. The purchase
price of $620 is payable over two years beginning in December 2002. The Travel
Company had received payments from the Company of $702 and $1,362 for Fiscal
years ended February 28, 2003 and 2002, respectively, for its management of the
travel nurse division. The Company is amortizing the cost of the buyout over the
five years that were remaining on the management contract.
F-13
Acquisitions (Continued)
During Fiscal 2003, the Company purchased substantially all of the assets and
operations of eight temporary medical staffing companies totaling $3,041, of
which $2,071 was paid in cash and the remaining balance is payable under notes
payable with maturities through January 2007.
The notes bear interest at rates between 6% to 8% per annum. The purchase prices
were allocated primarily to goodwill (approximately $2,282). In April 2003, the
Company sold its interest in one of these temporary medical staffing companies
to its franchisee for $130.
The acquisitions were accounted for under the purchase method of accounting,
and, accordingly, the accompanying consolidated financial statements include the
results of the acquired operations from their respective acquisition dates.
4. Discontinued Operations
In December 2004, after reviewing the significant debt obligations of the
Company and the alternatives thereto, the Board of Directors of the Company
concluded and authorized the Company to seek to sell its AllCare Nursing
business. On April 22, 2005, the Company sold substantially all of the assets of
its AllCare Nursing Services business, which assets consisted primarily of
goodwill and accounts receivable, and liabilities to Onward Healthcare, Inc.
("Onward") of Norwalk, Connecticut, for approximately $20.0 million in cash, of
which $1.2 million was placed in escrow pending the collection of the accounts
receivable. AllCare Nursing was located in Melville, New York, with offices in
Union, New Jersey, and in Stratford, Connecticut, and provided supplemental
staffing and travel nurses to healthcare facilities in the greater New York City
metropolitan area, northern New Jersey, and Connecticut.
The Company originally purchased AllCare Nursing, then known as Direct Staffing
Inc. ("DSI") and DSS Staffing Corp. ("DSS") (together "Direct Staffing"), in
January 2002 for $30.2 million. The purchase price was evidenced by two series
of promissory notes issued to each of the four owners of DSS and DSI. The first
series of notes (the "First Series"), in the aggregate principal amount of
$12,975, bore interest at 5% per annum and was payable in 36 consecutive equal
monthly installments of principal, together with interest thereon, with the
first installment having become due on March 1, 2002. The second series of notes
(the "Second Series"), in the aggregate principal amount of $17,220, bore
interest at the rate of 5% per annum and was payable as follows: $11 million,
together with interest thereon, on April 30, 2005 (or earlier if certain capital
events occur prior to such date) and the balance in 60 consecutive equal monthly
installments of principal, together with interest thereon, with the first
installment becoming due April 30, 2005. If the contingent purchase price
adjustment was triggered on April 30, 2005, then the aggregate principal balance
of the Second Series was to be increased by such contingent purchase price.
Payment of the First Series and the Second Series was collateralized by a second
lien on the assets of the acquired licensees (see Note 9). In June 2003, the
notes were modified.
The Company was required to use the funds which it received from Onward to
retire approximately $13.0 million in bank debt and to repay and restructure the
$28.1 million in promissory notes outstanding to the sellers of Direct Staffing.
In connection with obtaining its lender's consent to the sale and paying down
its bank debt, the Company's revolving credit facility was permanently reduced
from $35.0 million to $15.0 million. As a result of the repayment and
restructuring of the Direct Staffing promissory notes, those obligations were
reduced from $28.1 million to $8.1 million.
The Company wrote-off goodwill of $3.8 million as of February 28, 2005, which
represents the difference in the sales price of AllCare Nursing and the book
value of the net assets including goodwill.The company's consolidated financial
statements reflect AllCare Nursing as discontinued operations in the financial
results of the Company for fiscal years 2005, 2004, and 2003.
F-14
Discontinued Operations (Continued)
The components of Assets and Liabilites Held For Sale for fiscal 2004 and 2005
are presented in the chart below:
February 28, 2005 February 29, 2004
----------------- -----------------
Assets Held For Sale
Accounts receivable net $10,464 $15,956
Prepaid expenses 103 11
Fixed Assets 41 63
Intangibles 4,761 5,426
Goodwill 21,689 25,532
Other assets 40 37
Deferred income taxes (1,493)
--------- ---------
Total Assets Held For Sale $37,098 $45,532
========= =========
Liabilities Held For Sale
Accounts payable $231 $135
Accrued expenses 685 186
Due under bank Financing 11,185 16,064
Notes payable 21,667 21,193
--------- ---------
Total Liabilities Held for Sale $33,768 $37,578
========= =========
Net Assets Held For Sale $ 3,330 $ 7,954
========= =========
Revenue and Pretax Income (loss) for discontinued operations for fiscal 2005,
2004 and 2003 is presented in the chart below:
February 28, 2005 February 29, 2004 February 28, 2003
----------------- ----------------- -----------------
Revenue $37,373 $49,191 $49,843
------- ------- -------
Pre Tax (loss) income $(1,945) $ 1,692 $ 2,177
-------- -------- -------
Interest expense included in discontinued operations is $2,253, $2,288 and
$2,127 for fiscal year end February 28, 2005, February 29, 2004 and February 28,
2003 respectively.
F-15
5.Fixed Assets
Fixed assets consist of the following:
- -----------------------------------------------------------------------------------------------
Estimated Useful February 28, February 29,
Life in Years 2005 2004
Computer equipment and software 3 to 5 $ 810 $ 1,395
Office equipment, furniture and fixtures 5 69 215
Leasehold improvements 5 154 191
------------------------------
1,033 1,801
Less: accumulated depreciation
and amortization 583 1,016
------------------------------
Total $ 450 $ 785
==============================
- -----------------------------------------------------------------------------------------------
As of February 28, 2005 and February 29, 2004, fixed assets include amounts for
equipment acquired under capital leases with an original cost of $262.
Depreciation expense was $436, $1,168 and $1,376 in 2005, 2004 and 2003,
respectively. The accumulated amortization on equipment acquired under capital
lease obligations was $223 and $170 as of February 28, 2005 and February 29,
2004, respectively.
6. Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consist of the following:
- ---------------------------------------------------------------------------------------------
February 28, February 29,
2005 2004
Prepaid workers compensation expense $ 3,398 $ 3,946
Other 1,018 743
-----------------------------
Total $ 4,416 $ 4,689
=============================
- ---------------------------------------------------------------------------------------------
7. Accrued Expenses
Accrued expenses consist of the following:
- ---------------------------------------------------------------------------------------------
February 28, February 29,
2005 2004
Payroll and related taxes $ 939 $ 2,111
Accrued licensee payable 998 1,076
Insurance accruals 2,173 2,264
Interest payable 23 20
Other 1,298 811
-----------------------------
Total $ 5,431 $ 6,282
=============================
- ---------------------------------------------------------------------------------------------
F-16
8. Financing Arrangements
Debt financing payable consists of the following:
- --------------------------------------------------------------------------------
February 28, February 29,
2005 2004
Financing Agreement $ 9,660 $ 9,478
(a)During April 2001, the Company entered into a Financing Agreement ("New
Financing Arrangement") with a lending institution, whereby the lender agreed to
provide a revolving credit facility of up to $25 million. The New Financing
Agreement was amended in October 2001 to increase the facility to $27.5 million.
Amounts borrowed under the New Financing Agreement were used to repay $20,636 of
borrowing on its existing facility. As a result, the Company recognized a loss
of approximately $850 (before a tax benefit of $341) in fiscal 2002, which
includes the write-off of deferred financing costs and an early termination fee.
Availability under the New Financing Agreement is based on a formula of eligible
receivables, as defined in the New Financing Agreement. The borrowings bear
interest at rates based on the LIBOR plus 3.65%. At February 28, 2002, the
interest rate was 5.65%. Interest rates ranged from 5.4% to 8.2% in Fiscal 2002.
An annual fee of 0.5% is required based on any unused portion of the total loan
availability.
In November 2002, the lending institution with which the Company has the secured
facility increased the revolving credit line to $35 million and provided for an
additional term loan facility totaling $5 million. Interest accrues at a rate of
3.95% over the LIBOR on the revolving credit line and 6.37% over the LIBOR on
the term loan facility. The Facility expires in November 2005. The term loan
facility is for acquisitions and capital expenditures. Repayment of this
additional term facility will be on a 36 month straight line amortization. The
Agreement contains various restrictive covenants that, among other requirements,
restrict additional indebtedness. The covenants also require the Company to meet
certain financial ratios. In November 2002, the interest rates were revised to
4.55% over the LIBOR on the revolving line and 7.27% over the LIBOR on the term
loan facility as part of a loan modification. As of February 28, 2005 and
February 29, 2004, the outstanding balance on the revolving credit facility was
$18,772 and $22,698, respectively. Of the outstanding balances on the revolving
credit facility, $9,112 and $13,221 are considered liabilities held for sale at
February 28, 2005 and February 29, 2004 respectively. As of February 28, 2005
and February 29, 2004, the outstanding balances on the term loan, which are
considered liabilities held for sale were $2,073 and $2,841, respectively.
On June 13, 2003, the Company received a waiver from the lender for non
compliance of certain Facility covenants as of February 28, 2003. Interest rates
on both the revolving line and term loan facility were increased 2% and can
decrease if the Company meets certain financial criteria. In addition, certain
financial ratio covenants were modified. The additional interest is not payable
until the current expiration date of the Facility which is November 2005. As
part of this modification, the lender and the DSS and DSI noteholders amended
the subordination agreement (see Note 9). As a result of that amendment, the two
series of promissory notes to the former owners of DSS and DSI have been
condensed into one series of notes. One of the notes is for a term of seven
years, with a minimum monthly payment (including interest) of $40 in year one
and minimum monthly payments of $80 in subsequent years, with a balloon payment
of $3,600 due in year four. The balance on the first note after the balloon
payment is payable over the remaining three years of the note, subject to
limitations.
F-17
Financing Arrangements (Continued)
The other three notes are for 10 years, with minimum monthly payments (including
interest) of $25 in the aggregate in the first year and minimum monthly payments
of $51 in the aggregate for the remaining years. Any unpaid balance at the end
of the note term will be due at that time. Additional payments may be made to
the noteholders if the Company achieves certain financial ratios. In conjunction
with this revision, one of the note holders has agreed to reduce its note by
approximately $2,800, contingent upon the Company's compliance under the
modified subordination agreement.
On January 8, 2004, an amendment to the $35 million revolving loan with HFG
Healthco-4LLC ("HFG") was entered into modifying certain financial ratio
covenants as of November 30, 2003.
On May 24, 2004, an amendment to the $35 million revolving loan with HFG was
entered into modifying certain financial ratio covenants as of February 29,
2004.
On July 14, 2004, an amendment to the $35 million revolving loan with HFG was
entered into modifying certain financial ratio covenants as of May 31, 2004.
On October13, 2004, an amendment to the $35 million revolving loan with HFG was
entered into modifying certain financial ratio covenants as of August 31, 2004.
On January 14, 2005, an amendment to the $35 million revolving loan with HFG was
entered into modifying certain financial ratio covenants as of November 30,
2004.
On April 22, 2005 the Company entered into an extension of its $35 million
revolving loan with HFG reducing the amount of the facility from $35 million to
$15 million, reducing the availability from 85% of receivables to 80% of
receivables and extending the term until April 2008. On April 22, 2005 in
connection with sale of AllCare, the liability due on the Company's revolving
line of credit was paid down by the amount of $12,123 and the outstanding term
loan balance of $1,888 was extinguished. The Company is in negotiations with HFG
on new covenants for the facility. As of February 28, 2005 those covenants have
not been finalized as such the Company would not be in compliance with the
existing covenants after February 28, 2005. Accordingly, the amount due under
the New Financing Arrangement has been included in current liabilities.
On June 8, 2005, an amendment to the $35 million revolving loan with HFG was
entered into waiving default on certain financial ratio covenants as of February
28, 2005.
(b) Annual maturities of debt financing payable discussed above are as follows:
---------------------------------------------------
2008 9,660
-----------
Total $ 9,660
===========
---------------------------------------------------
F-18
9. Notes and Guarantee Payable
Notes and guarantee payable consist of the following:
- --------------------------------------------------------------------------------
February 28, February 29,
2005 2004
Notes payable to DSS and DSI (a) $ 8,100 $ 8,100
Other (b) 803 803
Notes from related parties (c) 1,500
Convertible debentures (d) 1,260 -
Guarantee of TLCS liability (e) - 2,293
----------------------------------
11,663 11,196
Less: current portion 2,814 725
----------------------------------
$ 8,849 $ 10,471
----------------------------------
- --------------------------------------------------------------------------------
(a) The Company originally issued two series of promissory notes to each of the
four owners of DSS and DSI (three related and one unrelated party; see Note
4). The first series of notes (the "First Series"), in the aggregate
principal amount of $12,975, bore interest at a rate of 5% per annum and
was payable in 36 equal monthly installments of principal, together with
interest, with the first installment having become due on March 1, 2002.
The second series of notes (the "Second Series"), in the aggregate
principal amount of $17,220, bore interest at a rate of 5% per annum and
was payable as follows: $11 million, together with interest, on April 30,
2005 (or earlier if certain events, as defined, occur prior to such date)
and the balance in 60 equal monthly installments of principal, together
with interest, with the first installment becoming due on April 30, 2005.
On June 13 2003, in connection with the receipt by the Company of a waiver
from its senior lender for non-compliance of certain Facility covenants,
the lender and the DSS and DSI noteholders amended the subordination
agreement and the Company and the noteholders amended the notes issued to
those noteholders (see Note 7). As a result of the amendment, what had been
two promissory notes issued to each of the former owners of DSS and DSI
have been condensed into one note. The amended note issued to one of the
former owners is for a term of seven years with a minimum monthly payment
(including interest) of $40 in year one and minimum monthly payments of $80
in subsequent years, with a balloon payment of $3,600 due in year four. The
balance on that note after the balloon payment is payable over the
remaining three years of the note, subject to limitations. The amended note
issued to other three former owners are for ten years, with minimum monthly
payments (including interest) of $25 in the aggregate in the first year and
minimum monthly payments of $51 in the aggregate for the remaining years.
Any unpaid balance at the end of the note term will be due at that time.
Additional payments are to be made to the noteholders if the Company
achieves certain financial ratios. In conjunction with this revision, one
of the noteholders has agreed to reduce his note by approximately $2,800,
provided the Company does not default under the notes or, in certain
instances, the Company's senior lending facility. Payment of the First
Series and the Second Series notes and of the amended notes was and is
collateralized by the assets of the acquired licensees. Payments on these
notes are in accordance with a subordination agreement between the four
former owners of DSS and DSI, the Facility and the Company. These notes are
subordinated to the borrowings under the Company's revolving credit
facilities (see Note 8). On April 22, 2005 the Company sold the assets
collateralizing the above mentioned notes and through a
Notes and Guarantee Payable (Continued)
combination of repayment and restructuring of the notes reduced the amount
outstanding on the notes to $8,100 which is shown in notes payable long-term at
February 28, 2005. The balance of the notes payable $13,589 are shown in
liabilities held for sale.
As part of the repayment and restructuring of the notes, the obligations of one
former owner were discharged entirely. The notes of the three other owners were
modified to provide for interest at the rate of 4% per annum for one year and 5%
per annum thereafter, with the first payment being due and payable in May 2006.
Principal payments under the restructured notes are to be made in 120 monthly
installments, commencing no earlier than May 2006 and being made only if and
when certain financial targets are achieved. The Notes are secured by a
subordinated security interest in the accounts, equipment, fixtures, goods and
inventory of ATC Healthcare Services, Inc. The notes continue to be subordinated
to borrowings under the Company's credit facility, as well as to the $1,500 note
it issued in December 2004 to the wife of one of its executive officers, which
is described below.
The three owners also hold Notes in the aggregate principal amount of $330 that
mature on October 31, 2005 and are subject to the subordination agreement
between the owner and the Company's senior lender. The Notes bear interest at
the rate of 8% per annum. They are convertible at the option of the holders into
Class A Common Stock of the Company based on the average closing price of the
stock for the three trading days immediately preceding the conversion date. It
is contemplated that the Notes will be repaid from funds released from the
escrow created as a part of the Company's sale of its AllCare Nursing business.
(b) The Company issued various notes payable bearing interest at rates ranging
from 6% and 12% per annum, in connection with various acquisitions with
maturities through January 2007.
(c) On December 15, 2004 the Company entered into a $1.5 million 15% convertible
subordinated note with the wife of one of the Executive officers of the Company.
The Note bears interest at 15% per annum and matures on January 15, 2007. It is
to be repaid in eight equal installments commencing April 15 ,2005, subject to
restrictions on the sources of such payment. At the option of the holder, all or
a portion of the note may be converted at any time, plus accrued but unpaid
interest, into shares of Class A Common Stock at a per share price equal to the
closing bid price of the Common Stock on the date of conversion.
(d) On April 19, 2004 upon execution of the Standby Equity Distribution
Agreement, a Convertible Debenture in the principal amount of $140 was issued to
Cornell Capital Partners as a Commitment fee. The Convertible Debenture has a
term of three years, accrues interest at 5% and is convertible into the
Company's common stock at a price per share of 100% of the lowest closing bid
price for the three days immediately preceding the conversion date. At February
28, 2005 $90 was outstanding on the promissory note.
In April 2004 the Company issued $500 of Convertible Notes due April 2, 2005 and
warrants to purchase $250,000 shares of Class A common stock at $0.75 per share.
The Convertible Notes do not bear interest and are to be repaid in Common Stock
of the Company priced at the effective price at which Common Stock or securities
convertible into Common Stock of the Company was sold between October 2, 2004
and April 2, 2005. The Company is in the process of causing Common Stock priced
at $0.27 per share to be issued to repay the Notes.
For financial reporting purposes the warrants were accounted for as a liability.
The fair value of the warrants which amounted to $95 on the date of grant was
recorded as a reduction to the April Maturity Notes.
F-20
Notes and Guarantee Payable (Continued)
The warrant liability will be reclassified to equity on the effective date of
the registration statement, evidencing the non-impact of these adjustments on
the Company's financial position and business operations. The fair value of the
warrants was estimated using the Black-Scholes option-pricing model with the
following assumptions: no dividends; risk free interest rate of 4%; the
contractual life of 4 years and volatility of 111%. There was no significant
change in the fair value of the warrants at February 28, 2005 from the time the
warrants were granted.
On February 18, 2005 the Company issued a Promissory Note to Cornell Capital
Partners L.P. in the principal amount of $820 . As was contemplated, the Note is
to be repaid through Issuances of Class A Common stock to Cornell Capital
Partners under the Standby Equity Distribution Agreement between the Company and
Cornell Captial Partners. The Company has placed a certificate evidencing shares
of its class A Common Stock in escrow in connection with the Note and the
Standby Equity Distribution Agreement, which are not deemed issued and
outstanding until released form the escrow. As of February 28, 2005, the
certificate evidenced 6,111,872 At February 28, 2005 $760 was outstanding on the
Promissory Note. Proceeds from this advance were used to fund general working
capital needs.
(e) Guarantee of Tender Loving Care Services, ("TLCS") Liability - The Company
is contingently liable on $2.3 million of obligations owed by TLCS which is
payable over eight years. On November 8, 2002, TLCS filed a petition for relief
under Chapter 11 of the United States Bankruptcy Code. As a result, the Company
had recorded a provision of $2.3 million representing the balance outstanding on
the related TLCS obligations. The Bankruptcy Court has approved the plan for
concluding the TLCS Bankruptcy. The plan provides for, among other things, that
claims falling within this guarantee should be paid in full. The assets of TLCS
have been sold by the bankruptcy court and the Company has been advised that the
sale price is sufficient to cover the claims of TLCS creditors. The Company is
entitled to be indemnified by TLCS if it has to pay any monies on the guarantee
and has filed claims for such indemnification in the TLCS Bankruptcy case. Those
claims have not been disputed. Based on the above facts, the Company and its
legal counsel have concluded that it is no longer probable that the Company will
be liable for any amounts under the guarantee and in November 2004 the Company
reversed the provision for such guarantee.
(f) Annual maturities of notes payable discussed above are as follows:
-------------------------------------------------
2005 $ 2,814
2006 720
2007 29
2008 0
2009 0
Thereafter 8,100
---------
Total $ 11,663
=========
------------------------------------------------
F-21
10. Income Taxes
The provision (benefit) for income taxes consists of the following:
Fiscal Year Ended
February 28, 2005 February 29, 2004 February 28, 2003
- ----------------------------------------------------------------------------------------------------
Current:
Federal $ - $ - $ -
State 39 55 40
----------------------------------------------------------
39 55 40
----------------------------------------------------------
Deferred
Federal 3,477 836 (2,686)
State 47 (170)
----------------------------------------------------------
3,477 853 (2,856)
----------------------------------------------------------
Total income tax provision (benefit)
expense $ 3,516 $ 938 $ (2,816)
==========================================================
- ----------------------------------------------------------------------------------------------------
A reconciliation of the differences between income taxes computed at the federal
statutory rate and the provision (benefit) for income taxes as a percentage of
pretax income from continuing operations for each year is as follows:
2005 2004 2003
- --------------------------------------------------------------------------------
Federal statutory rate (34.0%) (34.0%) (34.0%)
State and local income taxes, net
of federal income tax benefit 1.6% 0.7% 2.1%
Valuation allowance increase (decrease) 103.3% 48.1% -
Other 0.2% (1.3%) .1%
--------------------------------
Effective rate 71.1% 13.5% (36.0%)
- --------------------------------------------------------------------------------
The Company's net deferred tax assets are comprised of the following:
- --------------------------------------------------------------------------------
February 28, 2005 February 29, 2004
Current:
Allowance for doubtful accounts $ 608 $ 295
Accrued expenses 1,007 1,219
-------------------------------------
1,615 1,514
-------------------------------------
Valuation allowance (1,615) (1,514)
-------------------------------------
- -
-------------------------------------
Non-current:
Revenue recognition - 16
Net operating loss carryforward 6,048 3,566
Depreciation and amortization 542 856
TLCS guarantee - 916
-------------------------------------
6,590 5,354
-------------------------------------
Valuation allowance (6,590) (1,877)
- --------------------------------------------------------------------------------
$ - $ 3,477
=====================================
- --------------------------------------------------------------------------------
F-22
INCOME TAXES (CONTINUED)
For the years ended February 28, 2005 and February 29, 2004, income tax expense
is due primarily to the changes in valuation allowance provided in those
periods. During the third quarter of fiscal 2004, it became apparent that the
hospital patient volumes were not returning as anticipated and the Company would
not return to profitable operations in fiscal 2004. . Due to its continued
losses in fiscal 2005 the Company provided a valuation allowance for the
remaining deferred tax asset. The Company intends to maintain its valuation
allowance until such time as positive evidence exists to support reversal of the
valuation allowance. Income tax expense recorded in the future will be reduced
to the extent of offsetting reductions in the Company valuation allowance.
At February 28, 2005, the Company has a federal net operating loss of
approximately $10,490 which expires in 2020 through 2024.
11. COMMITMENTS AND CONTINGENCIES
Lease Commitments:
Future minimum rental payments under noncancelable operating leases relating to
office space and equipment rentals that have an initial or remaining lease term
in excess of one year as of February 28, 2005 are as follows:
Year Ending February 28,
2006 $1,005
2007 782
2008 690
2009 504
2010 463
Thereafter 397
---------
Total minimum lease payments $3,841
-----------------------------=========
Certain operating leases contain escalation clauses with respect to real estate
taxes and related operating costs.
Rental expense was approximately $1,676, $1,702 and $1,504 in Fiscal 2005, 2004
and 2003, respectively.
Employment Agreements:
In November 2002, the Company entered into amended employment agreements with
two of its officers, under which they will receive annual base salaries of $302
and $404, respectively. Their employment agreements are automatically extended
at the end of each Fiscal year and are terminable by the Company.
In September 2003, the Company entered into a three year employment agreement
with another officer of the Company, under which he receives an annual base
salary of $185, with a $10 increase per annum.
If a "change of control" (as defined in the agreements) were to occur and cause
the respective employment agreements to terminate, the Company would be required
to make lump sum severance payments of $906 and $1,212, respectively to the
officers who amended their employment contracts in November 2002. In addition,
the Company would be liable for payments to other officers, of which such
payments are immaterial.
F-23
COMMITMENTS AND CONTINGENCIES (CONTINUED)
Litigation
The Company is subject to various claims and legal proceedings covering a wide
range of matters that arise in the ordinary course of its business. Management
and legal counsel periodically review the probable outcome of such proceedings,
the costs and expenses reasonably expected to be incurred, and the availability
and extent of insurance coverage and established reserves. While it is not
possible at this time to predict the outcome of these legal actions, in the
opinion of management, based on these reviews and the likely disposition of the
lawsuits, these matters will not have a material effect on the Company's
financial position, results of operations or cash flows.
12. STOCKHOLDERS' EQUITY
Convertible Preferred Stock Offering:
On February 26, 2003, the Company announced it was offering to sell 4,000 shares
of 7% Convertible Series A Preferred Stock at a cost of $500 per share to
certain accredited investors in an offering exempt from registration under the
Securities Act of 1933, as amended.
Each share of the Preferred Stock may be converted at any time by the holder
after April 30, 2003 at a conversion price equal to the lower of (i) 120% of the
weighted average closing price of the Company's common stock on the American
Stock Exchange during the 10 trading day period ending April 30, 2003, and (ii)
120% of the weighted average closing price of the Company's common stock on the
American Stock Exchange during the 10 trading day period ending on the date the
Company accepts a purchaser's subscription for shares, subject in either case to
adjustment in certain events. As of May 2, 2003, 2,000 shares were sold with
conversion prices of $.73 to $.93 per share.
The Preferred Stock will be redeemed by the Company on April 30, 2009 at $500
per share, plus all accrued dividends. At any time after April 30, 2004, the
Company may redeem all or some of a purchaser's shares of Preferred Stock, if
the weighted-average closing price of the Company's common stock during 10
trading day period ending on the date of notice of redemption is greater than
200% of the conversion price of such purchaser's shares of Preferred Stock.
Common Stock -- Recapitalization and Voting Rights:
During Fiscal 1996, the shareholders approved a plan of recapitalization by
which the existing Common Stock, $.01 par value, was reclassified and converted
into either Class A Common Stock, $.01 par value per share, or Class B Common
Stock, $.01 par value per share. Prior to the recapitalization, shares of Common
Stock that were held by the beneficial owner for at least 48 consecutive months
were considered long-term shares, and were entitled to 10 votes for each share
of stock. Pursuant to the recapitalization, long-term shares were converted into
Class B Common Stock and short-term shares (beneficially owned for less than 48
months) were converted into Class A Common Stock.
A holder of Class B Common Stock is entitled to ten votes for each share and
each share is convertible into one share of Class A Common Stock (and will
automatically convert into one share of Class A Common Stock upon transfer
subject to certain limited exceptions). Except as otherwise required by the
Delaware General Corporation Law, all shares of common stock vote as a single
class on all matters submitted to a vote by the shareholders. The
recapitalization included all outstanding options and warrants to purchase
shares of Common Stock which were converted automatically into options and
warrants to purchase an equal number of shares of Class A Common Stock.
F-24
STOCKHOLDERS EQUITY (CONTINUED)
On August 12, 2003 the shareholders of the Company approved an amendment to the
Company's Restated Certificate of Incorporation to increase the total number of
authorized shares of Class A Common Stock from 50,000,000 shares to 75,000,000
shares.
During Fiscal 2004, 10,774 shares of Series A Common Stock were issued upon the
conversion of the same number of Series B Common Stock.
During Fiscal 2004, the Company issued 55,618 shares of Series A Common Stock
pursuant to the Employee Stock Purchase Plan.
On April 19, 2004, The Company entered into a Standby Equity Distribution
Agreement with Cornell Capital Partners, L.P. Pursuant to the Standby Equity
Distribution Agreement, the Company may, at its discretion, periodically sell to
Cornell Capital Partners shares of common stock for a total purchase price of up
to $5,000,000. For each share of common stock purchased under the Standby Equity
Distribution Agreement, Cornell Capital Partners will pay the Company 97% of the
lowest closing bid price of the common stock during the five consecutive trading
days immediately following the notice date. Further, the Company has agreed to
pay Cornell Capital Partners, L.P. 5% of the proceeds that the Company receives
under the Standby Equity Distribution Agreement, issued a Convertible Debenture
in the principal amount of $140 as a commitment fee. The Agreement is subject to
the Company filing and maintaining an effective S-1 registration. In November
2004, the Securities and Exchange Commission declared the Company's S-1
Effective. As of February 28, 2005 The Company has issued 1,682,104 shares to
Cornell Capital Partners under the Agreement and $140 Convertible Debenture (and
to pay a fee to Arthurs Lestrange & Company, Inc., as a private placement agent)
with sales prices of $0.27 to $0.41 per share. The Company received net proceeds
of $176 (net of expenses of $358) from the sale of these securities.
During Fiscal 2005, 55,000 shares of Series A Common Stock were issued upon the
conversion of the same number of Series B Common Stock.
During Fiscal 2005, the Company issued 13,796 shares of Series A Common Stock
pursuant to the Employee Stock Purchase Plan.
During Fiscal 2005, The Company issued 165,000 shares at $0.30 per share for
consulting services. Stock Options:
1993 Stock Option Plan
During the year ended February 28, 1994, the Company adopted a stock option plan
(the "1993 Stock Option Plan"). Stock options issued under the 1993 Stock Option
Plan may be incentive stock options ("ISOs") or non-qualified stock options
("NQSOs"). This plan replaced the 1986 Non- Qualified Plan and the 1983
Incentive Stock Option Plan which terminated in 1993 except as to options then
outstanding. Employees, officers, directors and consultants are eligible to
participate in the 1993 Stock Option Plan. Options are granted at not less than
the fair market value of the Common Stock at the date of grant and vest over a
period of two years.
A total of 3,021,750 stock options were granted under the 1993 Stock Option
Plan, at prices ranging from $0.50 to $3.87, of which 809,000 remain outstanding
at February 28, 2005.
F-25
STOCKHOLDERS EQUITY (CONTINUED)
1994 Performance-Based Stock Option Plan
During the year ended February 28, 1995, the Company adopted a stock option plan
(the "1994 Performance-Based Stock Option Plan") that provides for the issuance
of up to 3.4 million shares of Common Stock. Executive officers of the Company
and its wholly owned subsidiaries are eligible for grants. Performance-based
stock options are granted for periods of up to 10 years and the exercise price
is equal to the average of the closing price of the common stock for the 20
consecutive trading days prior to the date on which the option is granted.
Vesting of Performance Based Stock Options is during the first four years after
the date of grant, and is dependent upon increases in the market price of the
common stock.
F-25
Since inception, a total of 10,479,945 stock options were granted under the 1994
Performance-Based Stock Option Plan, at option prices ranging from $.53 to
$3.14, of which 2,767,382 remain outstanding at February 28, 2005.
1998 Stock Option Plan
During Fiscal 1999, the Company adopted a stock option plan (the "1998 Stock
Option Plan") under which an aggregate of two million shares of Common Stock are
reserved for issuance. Options granted under the 1998 Stock Option Plan may be
ISO's or NQSO's. Employees, officers and consultants are eligible to participate
in the 1998 Stock Option Plan. Options are granted at not less than fair market
value of the common stock at the date of grant and vest over a period of two
years.
A total of 1,898,083 stock options were granted under the 1998 Stock Option
Plan, at exercise prices ranging from $.23 to $2.40, of which 650,500 remain
outstanding at February 28, 2005.
2000 Stock Option Plan
During Fiscal 2001, the Company adopted a stock option plan (the "2000 Stock
Option Plan") under which an aggregate of three million shares of common stock
is reserved for issuance. Both key employees and non-employee directors, except
for members of the compensation committee, are eligible to participate in the
2000 Stock Option Plan.
A total of 400,000 stock options were granted under the 2000 Stock Option Plan
at an exercise price of $1.02, of which all are outstanding as of February 28,
2005.
F-26
STOCKHOLDERS EQUITY (CONTINUED)
Information regarding the Company's stock option activity is summarized below:
- -------------------------------------------------------------------------------------------------------
STOCK OPTION OPTION PRICE WEIGHTED-AVERAGE
ACTIVITY EXERCISE PRICE
-------------------
Options outstanding as of February 28, 2002 5,136,182 $.25 - $1.02 $0.59
Granted 45,000 $.85 - $2.40 $1.46
Exercised (103,333) $.50 - $.56 $0.50
Terminated (6,667) $.56 $0.56
-------------------
Options outstanding as of February 28, 2003 5,071,182 $.25 - $2.40 $0.59
Granted 3,916,382 $.59 - $.79 $0.60
Exercised (56,500) $.23 - $.50 $0.30
Terminated (4,304,182) $.50 - $2.40 $0.57
-------------------
Options outstanding as of February 29, 2004 4,626,882 $.25 - $2.40 $0.63
Granted - - -
Exercised - - -
Terminated - - -
-------------------
Options outstanding as of February 28, 2005 4,626,882 $.25 - $2.40 $0.63
===================
- -------------------------------------------------------------------------------------------------------
Included in the outstanding options are 400,000 NQSOs which were exercisable at
February 28, 2005.
The following table summarizes information about stock options outstanding at
February 28, 2005:
- ---------------------------------------------------------------------------------------------------------------------
Options Outstanding Options Exercisable
- ---------------------------------------------------------------------------------------------------------------------
Weighted-average Weighted
Remaining Weighted Average
Range of Number Contractual Life (In Average Number Exercise
Exercise Prices Outstanding Years) Exercise Price Exercisable Price
- ---------------------------------------------------------------------------------------------------------------------
$.25 to $.58 245,500 4.4 $0.41 207,866 $0.39
- ---------------------------------------------------------------------------------------------------------------------
$0.59 3,811,382 8.8 $0.59 563,666 $0.59
- ---------------------------------------------------------------------------------------------------------------------
$.60 to $2.40 570,000 6.3 $1.00 515,833 $1.03
--------------------------------------------------------------------------------------------------
4,626,882 8.43 $0.63 1,287,365 $0.79
- ---------------------------------------------------------------------------------------------------------------------
Employee Stock Purchase Plan
The Company has an employee stock purchase plan under which eligible employees
may purchase common stock of the Company at 90% of the lower of the closing
price of the Company's Common Stock on the first and last day of the three-month
purchase period. Employees elect to pay for their stock purchases through
payroll deductions at a rate of 1% to 10% of their gross payroll.
13. EMPLOYEE 401(K) SAVINGS PLAN
The Company maintains an Employee 401(k) Savings Plan. The plan is a defined
contribution plan which is administered by the Company. All regular, full-time
employees are eligible for voluntary participation upon completing one year of
service and having attained the age of 21. The plan provides for growth in
savings through contributions and income from investments. It is subject to the
provisions of the Employee Retirement Income Security Act of 1974, as amended.
Plan participants are allowed to contribute a specified percentage of their base
salary. However, the Company retains the right to make optional contributions
for any plan year. For fiscal 2005 the Company contributed $16 to the plan.
Optional contributions were not made in fiscal 2004 and 2003.
F-27
14. LICENSEE SALES
The Company includes in its service revenues, service costs and general and
administrative costs revenues and costs associated with its licencee's.
Summarized below is the detail associated with the above discussed items for the
years ended February 28, 29, and 28, 2005, 2004 and 2003 respectively.
- --------------------------------------------------------------------------------
Year Ended Year Ended Year Ended
February 28, February 29, February 28,
2005 2004 2003
- --------------------------------------------------------------------------------
Company Service
Revenue $17,693 $24,720 $27,748
- --------------------------------------------------------------------------------
Licensee Service
Revenue $50,244 $56,490 $71,129
- --------------------------------------------------------------------------------
Total Revenue $67,937 $81,210 $98,877
- --------------------------------------------------------------------------------
Company Service
Costs $13,135 $17,506 $19,793
- --------------------------------------------------------------------------------
Licensee Service
Costs $41,597 $45,699 $56,992
- --------------------------------------------------------------------------------
Total Service Costs $54,732 $63,205 $76,785
- --------------------------------------------------------------------------------
Company General and
administrative costs $11,068 $12,605 $15,819
- --------------------------------------------------------------------------------
Licensee Royalty $5,965 $6,602 $8,913
- --------------------------------------------------------------------------------
Total General and
administrative costs $17,033 $19,207 $24,732
- --------------------------------------------------------------------------------
The Company settled various disputes with its Atlanta Licensee by selling its
Licensor rights to the Licensee for $875. The purchase price is evidenced by a
note which is payable over 60 months at a interest rate of 4.75%. In addition
various other issues which were being disputed through litigation with the
licensee were settled resulting in an offset to the note in the amount of $170.
The note due to the Company, which is guaranteed by the Licensee is reflected in
notes receivable. All amounts due the licensee were paid prior to February 28,
2005. The Company recorded in other income the net amount of $444.
15. SUBSEQUENT EVENTS
On April 22, 2005, the Company sold substantially all of the assets and
liabilities of its AllCare Nursing Services business, which consisted primarily
of goodwill and accounts receivable, to Onward Healthcare, Inc. ("Onward") of
Norwalk, Connecticut, for approximately $20.0 million in cash, of which $1.2
million was placed in escrow pending the collection of the accounts receivable.
AllCare Nursing was located in Melville, New York, with offices in Union, New
Jersey, and in Stratford, Connecticut, and provided supplemental staffing and
travel nurses to healthcare facilities in the greater New York City metropolitan
area, northern New Jersey, and Connecticut.
The Company originally purchased AllCare Nursing, then known as Direct Staffing
Inc. and DSS Staffing Corp. (together "Direct Staffing"), in January 2002 for
$30.2 million in five percent interest-bearing promissory notes. The Company was
required to use the funds which it received from Onward to retire approximately
$13.0 million in bank debt and to repay and restructure the $28.1 million in
promissory notes outstanding to the sellers of Direct Staffing. In connection
with obtaining its lender's consent to the sale and paying down its bank debt,
the Company's revolving credit facility was permanently reduced from $35.0
million to $15.0 million. As a result of the repayment and restructuring of the
Direct Staffing promissory notes, those obligations were reduced from $28.1
million to $8.1 million.
F-28
SUBSEQUENT EVENTS (CONTINUED)
The Company recorded a goodwill impairment of $3.8 million as of February 28,
2005, which represents the difference in the sales price of AllCare Nursing at
February 28, 2005 and the value of the net assets including goodwill which the
Company had on its financial statements as of that date.
The Company's Consolidated Financial Statements reflect the financial results of
the AllCare Nursing business for the fiscal years 2005, 2004 and 2003 as
discontinued operation.
F-29
16. QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized unaudited quarterly financial data for Fiscal 2005 and 2004 are as
follows (in thousands, except per share data) restated to reflect the AllCare
Nursing business as Discontinued Operations.:
- ------------------------------------------------------------------------------------------------------------------------
Year ended February 28, 2005 First Quarter Second Quarter Third Quarter Fourth Quarter
Total revenues $ 18,683 $ 17,571 $ 16,000 $ 15,683
-------------------------------------------------------------------
Net loss available to common stockholders on
continuing operations $ (476) $ (668) $ (1,241) $ (6,144)
===================================================================
Net income (loss) available to common stockholders on
Discontinued Operations $ 421 $ 403 $ (74) $ (2,695) (2)
-------------------------------------------------------------------
Total Net loss available to common stockholders $ (55) $ (265) $ (1,315) (1) $ (8,839) (2)
-------------------------------------------------------------------
Basic and diluted (loss) earnings per share
Loss from continuing operations $ (0.02) $ (0.03) $ (0.05) $ (0.24)
===================================================================
Income (loss) from discontinued operations $ 0.02 $ 0.02 $ (0.01) $ (0.11)
===================================================================
Net loss per common share-basic and diluted $ - $ (0.01) $ (0.06) $ (0.35)
===================================================================
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
Year ended February 29, 2004 First Quarter Second Quarter Third Quarter Fourth Quarter
Total revenues $ 22,687 $ 20,937 $ 19,534 $ 18,052
-------------------------------------------------------------------
Net loss available to common stockholders on
continuing operations $ (566) $(1,485) $ (4,836) $ (1,052)
===================================================================
Net income (loss) available to common stockholders
on Discontinued operations $ 331 $ 814 $ (228) $ 775
-------------------------------------------------------------------
Total net loss available to common stockholders $ (235) $ (671) $ (5,064) (3) $ (277)
-------------------------------------------------------------------
Basic and diluted (loss) earnings per share
Loss from continuing operations $ (0.02) $ (0.06) $ (0.20) $ (0.04)
===================================================================
Income from discontinued operations $ 0.01 $ 0.03 $ 0.00 $ 0.03
===================================================================
Net loss per common share-basic and diluted $ (0.01) $ (0.03) $ (0.20) $ (0.01)
===================================================================
- ------------------------------------------------------------------------------------------------------------------------
(1) In the third quarter of Fiscal 2005, the Company recorded a charge of
approximately $449 for a write-down of Goodwill and a credit to income of
$2,300 for the reversal of the TLC guarantee.
(2) In the fourth quarter of Fiscal 2005, the Company recorded a charge of
approximately $4,825 for a write-down of Goodwill of which $3,845 was for
discontinued operations, $1,400 for workers' compensation liabilities, and
$700 for a reserve for bad debt associated with its discontinued
operations.
(3) In the third quarter of Fiscal 2004, the Company recorded a charge of
approximately $2,600 for a restructuring expense.
F-30
ATC HEALTHCARE, INC. AND SUBSIDIARIES
- -------------------------------------
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
- -------------------------------------------------------------------------------------------------
Fiscal Year Ended
-------------------------------------------------------
February 28, 2005 February 29, 2004 February 28, 2003
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
Balance, beginning of period $ 276 $ 819 $ 714
Additions charged to costs and expenses 430 7 629
Deductions (242) (550) (524)
-------------------------------------------------------
Balance, end of period $ 464 $ 276 $ 819
=======================================================
Included in assets held for sale $ 1,397 $ 461 $ 965
=======================================================
Total $ 1,861 $ 737 $ 1,784
=======================================================
- -------------------------------------------------------------------------------------------------
F-31
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
------------------------------------------------
ACCOUNTING AND FINANCIAL
------------------------
DISCLOSURE
- -----------
(a) Previous Independent Accountants
(i) On September 17, 2003, ATC Healthcare, Inc. (the "Company") dismissed
PricewaterhouseCoopers LLP as its independent accountants. The Company's Audit
Committee participated in and approved the decision to change independent
accountants.
(ii) The reports of PricewaterhouseCoopers LLP on the financial statements
for the two Fiscal years prior to their dismissal contained no adverse opinion
or disclaimer of opinion and were not qualified or modified as to uncertainty,
audit scope or accounting principle.
(iii) In connection with its audit for the two Fiscal years prior to their
dismissal and through September 17, 2003, there were no disagreements with
PricewaterhouseCoopers LLP on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which
disagreements if not resolved to the satisfaction of PricewaterhouseCoopers LLP
would have caused them to make reference thereto in their report on the
financial statements for such years.
(iv) During the two Fiscal years prior to their dismissal and through
September 17, 2003, there were no reportable events (as defined in Regulation
S-K Item 304(a)(1)(v)).
(v) The Company has requested that PricewaterhouseCoopers LLP furnish it
with a letter addressed to the SEC stating whether or not it agrees with the
above statements. A copy of such letter, dated September 22, 2003, was filed as
exhibit16 to Form 8-K.
(b) New Independent Accountants
The Company engaged Goldstein Golub Kessler LLP as its new independent
accountants as of September 17, 2003. During the two Fiscal years prior to the
dismissal of PricewaterhouseCoopers LLP and through September 17, 2003, the
Company has not consulted with Goldstein Golub Kessler LLP regarding either (i)
the application of accounting principles to a specified transaction, either
completed or proposed; or the type of audit opinion that might be rendered on
the Company's financial statements, and neither a written report was provided to
the Company nor oral advice was provided by Goldstein Golub Kessler LLP
concluded on that was an important factor considered by the Company in reaching
a decision as to the accounting, auditing or financial reporting issue; or (ii)
any matter that was either the subject of a disagreement, as that term is
defined in Item 304(a)(1)(iv) of Regulation S-K and the related instructions to
Item 304 of Regulation S-K, or a reportable event, as that term is defined in
Item 304(a)(1)(v) of Regulation S-K.
31
ITEM 9A. CONTROLS AND PROCEDURES
-----------------------
(a) Our management has evaluated, with the participation of our Chief Executive
Officer and Chief Financial Officer, the effectiveness of our disclosure
controls and procedures as of the end of the period covered by this Annual
Report on Form 10-K. Based on this evaluation, our Chief Executive Officer and
Chief Financial Officer have concluded that our disclosure controls and
procedures are effective.
(b) During the last Fiscal quarter, there were no changes in the Company's
internal control over financial reporting that has materially affected, or is
reasonably likely to materially affect, the Company's internal control over
financial reporting.
ITEM 9B. OTHER INFORMATION
-----------------
None
PART III
- --------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
--------------------------------------------------
The information required by this section will be included in the Company's Proxy
Statement, which will be filed with the Securities Exchange Commission on or
before June 28, 2005 and is incorporated by reference herein.
ITEM 11. EXECUTIVE COMPENSATION
----------------------
The information required by this section will be included in the Company's Proxy
Statement, which will be filed with the Securities and Exchange Commission on or
before June 28, 2005 and is incorporated by reference herein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
-----------------------------------------------
AND MANAGEMNT AND RELATED STOCKHOLDER MATTERS
---------------------------------------------
The information required by this section will be included in the Company's Proxy
Statement, which will be filed with the Securities and Exchange Commission on or
before June 28, 2005 and is incorporated by reference herein.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
The information required by this section will be included in the Company's Proxy
Statement, which will be filed with the Securities and Exchange Commission on or
before June 28, 2005 and is incorporated by reference herein.
32
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
--------------------------------------
Fees billed to the Company by Goldstein Golub Kessler LLP during the fiscal year
ended February 28, 2005 were as follows:
Audit fees-Goldstein Golub Kessler LLP billed an aggregate of $75 in fees for
services rendered for the annual audit of the Company's consolidated financial
statements for the fiscal year ended February 28, 2005 and $28 for audit related
consisting fees of quarterly reviews and professional services realted to S-1
filing.
Financial Information System Design and Implementation fees-None.
All other fees-None.
The Audit Committee has reviewed the amount of fees paid to Goldstein
Golub Kessler LLP for the audit and non-audit services, and concluded that since
no non-audit services were provided and no fees paid therefore, they could not
have impaired the independence of Goldstein Golub Kessler LLP.
33
PART IV
- -------
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
---------------------------------------
(A) FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
The financial statements, including the supporting schedules, filed as part of
the report, are listed in the Table of Contents to the Consolidated Financial
Statements.
(B) REPORTS ON 8-K
There were two reports on Form 8-K filed by the Company during the Company's
last Fiscal quarter.
(1) On January 14, 2005, the Company filed a Report on Form 8-K furnishing
information under Items 7.01 and 9.01.
(C) EXHIBITS
The Exhibits filed as part of the Report are listed in the Index to
Exhibits below.
34
D. EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
3.1 Restated Certificate of Incorporation of the Company, filed July 11,
1998 (A)
3.2 Certificate of Amendment to the Restated Certificate of Incorporation
of the Company, filed August 22, 1991. (B)
3.3 Certificate of Amendment to the Restated Certificate of Incorporation
of the Company, filed September 3, 1992. (A)
3.4 Certificate of Retirement of Stock of the Company, filed February 28,
1994.
3.5 Certificate of Retirement of Stock of the Company, filed June 3, 1994.
(A)
3.6 Certificate of Designation, Rights and Preferences of the Class A
Preferred Stock of the Company, filed June 6, 1994. (A)
3.7 Certificate of Amendment of Restated Certificate of Incorporation of
the Company, filed August 23, 1994. (A)
3.8 Certificate of Amendment of Restated Certificate of Incorporation of
the Company, filed October 26, 1995. (C)
3.9 Certificate of Amendment of Restated Certificate of Incorporation of
the Company, filed December 19, 1995. (D)
3.10 Certificate of Amendment of Restated Certificate of Incorporation of
the Company, filed December 19, 1995 (D)
3.11 Amended and Restated By-Laws of the Company. (A)
3.12 Certificate of Amendment of Certificate of Incorporation of Staff
Builders, Inc., filed August 2, 2001 (X)
4.1 Specimen Class A Common Stock Certificate. (E)
4.2 Specimen Class B Common Stock Certificate. (F)
10.8 1986 Non-Qualified Stock Option Plan of the Company. (H)
10.9 First Amendment to the 1986 Non-Qualified Stock Option Plan, effective
as of May 11, 1990. (A)
10.10 Amendment to the 1986 Non-Qualified Stock Option Plan, dated as of
October 27, 1995. (I)
10.11 Resolutions of the Company's Board of Directors amending the 1983
Incentive Stock Option Plan and the 1986 Non-Qualified Stock Option
Plan, dated as of June 3, 1991. (A)
35
EXHIBIT NO. DESCRIPTION
- ----------- -----------
10.12 1993 Stock Option Plan of the Company. (A)
10.13 1998 Stock Option Plan of the Company (incorporated by reference to
Exhibit C to the Company's Proxy Statement dated August 27, 1998,
filed with the Commission on August 27, 1998).
10.14 Amended and Restated 1993 Employee Stock Purchase Plan of the Company
(J)
10.15 1998 Employee Stock Purchase Plan of the Company (incorporated by
reference to Exhibit D to the Company's Proxy Statement dated August
27, 1998, filed with the Commission on August 27, 1998).
10.18 1994 Performance-Based Stock Option Plan of the Company (incorporated
by reference to Exhibit B to the Company's Proxy Statement, dated July
18, 1994, filed with the Commission on July 27, 1994).
10.19 Stock Option Agreement, dated as of March 28, 1990, under the
Company's 1986 Non-Qualified Stock Option Plan between the Company and
Stephen Savitsky. (A)
10.20 Stock Option Agreement, dated as of June 17, 1991, under the
Company's 1986 Non-Qualified Stock Option Plan between the Company and
Stephen Savitsky. (A)
10.21 Stock Option Agreement, dated December 1, 1998, under the Company's
1993 Stock Option Plan between the Company and Stephen Savitsky. (K)
10.22 Stock Option Agreement, dated December 1, 1998, under the Company's
1994 Performance-Based Stock Option Plan between the Company and
Stephen Savitsky. (A)
10.23 Stock Option Agreement, dated as of March 28, 1990, under the
Company's 1986 Non-Qualified Stock Option Plan between the Company and
David Savitsky. (A)
10.24 Stock Option Agreement, dated as of June 17, 1991, under the Company's
1986 Non-Qualified Stock Option Plan between the Company and David
Savitsky. (A)
10.25 Stock Option Agreement, dated December 1, 1998, under the Company's
1993 Stock Option Plan between the Company and David Savitsky. (K)
10.26 Stock Option Agreement, dated December 1, 1998, under the Company's
1994 Performance-Based Stock Option Plan between the Company and David
Savitsky. (K)
10.27 Stock Option Agreement, dated December 1, 1998, under the Company's
1993 Stock Option Plan, between the Company and Edward Teixeira. (K)
See Notes to Exhibits
36
EXHIBIT NO. DESCRIPTION
- ----------- -----------
10.29 Stock Option Agreement, dated December 1, 1998, under the Company's
1994 Performance-Based Stock Option Plan, between the Company and
Edward Teixeira. (K)
10.30 Stock Option Agreement, dated December 1, 1998, under the Company's
1998 Stock Option Plan, between the Company and Edward Teixeira. (K)
10.39 Employment Agreement, dated as of June 1, 1987, between the Company
and Stephen Savitsky. (A)
10.40 Amendment, dated as of October 31, 1991, to the Employment Agreement
between the Company and Stephen Savitsky. (A)
10.41 Amendment, dated as of December 7, 1992, to the Employment Agreement
between the Company and Stephen Savitsky. (A)
10.42 Employment Agreement, dated as of June 1, 1987, between the Company
and David Savitsky. (A)
10.43 Amendment, dated as of October 31, 1991, to the Employment Agreement
between the Company and David Savitsky. (A)
10.44 Amendment, dated as of January 3, 1992, to the Employment Agreement
between the Company and David Savitsky. (A)
10.45 Amendment, dated as of December 7, 1992, to the Employment Agreement
between the Company and David Savitsky. (A)
10.54 Amended and Restated Loan and Security Agreement, dated as of January
8, 1997, between the Company, its subsidiaries and Mellon Bank, N.A.
(M)
See Notes to Exhibits
37
EXHIBIT NO. DESCRIPTION
- ----------- -----------
10.55 First Amendment to Amended and Restated Loan and Security Agreement
dated as of April 27, 1998, between the Company, its subsidiaries and
Mellon Bank, N.A. (G)
10.56 Master Lease Agreement dated as of December 4, 1996, between the
Company and Chase Equipment Leasing, Inc. (M)
10.57 Premium Finance Agreement, Disclosure Statement and Security
Agreement dated as of December 26, 1996, between the Company and A.I.
Credit Corp. (M)
10.58 Agreement of Lease, dated as of October 1, 1993, between Triad III
Associates and the Company. (A)
10.59 First Lease Amendment, dated October 25, 1998, between Matterhorn
USA, Inc. and the Company.
10.60 Supplemental Agreement dated as of January 21, 1994, between General
Electric Capital Corporation, Triad III Associates and the Company (A)
10.61 Agreement of Lease, dated as of June 19, 1995, between Triad III
Associates and the Company. (D)
10.62 Agreement of Lease, dated as of February 12, 1996, between Triad III
Associates and the Company. (D)
10.63 License Agreement, dated as of April 23, 1996, between Matterhorn
One, Ltd. and the Company (M)
10.64 License Agreement, dated as of January 3, 1997, between Matterhorn
USA, Inc. and the Company (M)
10.65 License Agreement, dated as of January 16, 1997, between Matterhorn
USA, Inc. and the Company . (M)
10.66 License Agreement, dated as of December 16, 1998, between Matterhorn
USA, Inc. and the Company. (S)
10.71 Asset Purchase and Sale Agreement, dated as of September 6, 1996, by
and among ATC Healthcare Services, Inc. and the Company and William
Halperin and All Care Nursing Service, Inc. (N)
10.73 Stock Purchase Agreement by and among the Company and Raymond T.
Sheerin, Michael Altman, Stephen Fleischner and Chelsea Computer
Consultants, Inc., dated September 24, 1996. (L)
See Notes to Exhibits
38
EXHIBIT NO. DESCRIPTION
- ----------- -----------
10.74 Amendment No. 1 to Stock Purchase Agreement by and among the Company
and Raymond T. Sheerin, Michael Altman, Stephen Fleischner and Chelsea
Computer Consultants, Inc., dated September 24, 1996 (L)
10.75 Shareholders Agreement between Raymond T. Sheerin and Michael Altman
and Stephen Fleischner and the Company and Chelsea Computer
Consultants, Inc., dated September 24, 1996. (L)
10.76 Amendment No. 1 to Shareholders Agreement among Chelsea Computer
Consultants, Inc., Raymond T. Sheerin, Michael Altman and the Company,
dated October 30, 1997 (L)
10.77 Indemnification Agreement, dated as of September 1, 1987, between the
Company and Stephen Savitsky. (A)
10.78 Indemnification Agreement, dated as of September 1, 1987, between the
Company and David Savitsky. (A)
10.79 Indemnification Agreement, dated as of September 1, 1987, between the
Company and Bernard J. Firestone. (A)
10.80 Indemnification Agreement, dated as of September 1, 1987, between the
Company and Jonathan Halpert. (A)
10.81 Indemnification Agreement, dated as of May 2, 1995, between the
Company and Donald Meyers. (M)
10.82 Indemnification Agreement, dated as of May 2, 1995, between the
Company and Edward Teixeira. (A)
10.84 Form of Medical Staffing Services Franchise Agreement (D)
10.89 Confession of Judgment, dated January 27, 2000, granted by a
subsidiary of the Company, to Roger Jack Pleasant.First Lease
Amendment, dated October 28, 1998, between Matterhorn USA, Inc. and
the Company. (B)
10.91 Forbearance and Acknowledgement Agreement, dated as of February 22,
2000, between TLCS's subsidiaries, the Company and Chase Equipment
Leasing, Inc. Agreement and Release, dated February 28, 1997, between
Larry Campbell and the Company. (C)
10.92 Distribution agreement, dated as of October 20, 1999, between the
Company and TLCS.(O)
10.93 Tax Allocation agreement dated as of October 20, 1999, between the
Company and TLCS. (O)
10.94 Transitional Services agreement, dated as of October 20, 1999,between
the company and TLCS. (O) See Notes to Exhibits
39
EXHIBIT NO. DESCRIPTION
- ----------- -----------
10.95 Trademark License agreement, dated as of October 20, 1999, between
the Company and TLCS. (O)
10.96 Sublease, dated as of October 20, 1999, between the Company and TLCS.
(O)
10.97 Employee Benefits agreement, dated as of October 20, 1999, between
the Company and TLCS. (O)
10.98 Amendment, dated as of October 20, 1999, to the Employment agreement
between the Company and Stephen Savitsky. (P)
10.99 Amendment, dated as of October 20, 1999, to the Employment agreement
between the Company and David Savitsky. (P)
10.105 Second Amendment to ATC Revolving Credit Loan and Security Agreement,
dated October 20, 1999 between the Company and Mellon Bank, N.A. (P)
10.106 Master Lease dated November 18, 1999 between the Company and
Technology Integration Financial Services. (Q)
10.107 Loan and Security Agreement between the Company and Copelco/American
Healthfund Inc. dated March 29, 2000. (Q)
10.108 Loan and Security Agreement First Amendment between the Company and
Healthcare Business Credit Corporation (formerly known as
Copelco/American Health fund Inc.) dated July 31, 2000. (R)
10.109 Employment agreement dated August 1, 2000 between the Company and Alan
Levy (R)
10.110 Equipment lease agreements with Technology Integration Financial
Services, Inc. (R)
10.111 Loan and Security Agreement dated April 6, 2001 between the Company
and HFG Healthco-4 LLC (W)
10.112 Receivables Purchase and Transfer Agreement dated April 6, 2001
between the Company and HFG Healthco-4 LLC (W)
10.113 Asset purchase agreement dated October 5, 2001, between the Company
and Doctors' Corner and Healthcare Staffing, Inc. (U)
10.114 Asset purchase agreement dated January 31, 2002, between the Company
and Direct Staffing, Inc. and DSS Staffing Corp. (V)
10.115 Amendment to Employment agreement dated November 28, 2001 between the
Company and Stephen Satisfy (Y)
10.116 Amendment to Employment agreement dated November 28, 2001 between the
Company and David Savitsky (Y)
See Notes to Exhibits
40
EXHIBIT NO. DESCRIPTION
- ----------- -----------
10.117 Amendment to Employment agreement dated December 18, 2001 between the
Company and Edward Teixeira (Y)
10.118 Amendment to Employment agreement dated May 24, 2002 between the
Company and Alan Levy (Y)
10.119 Loan and Security Agreement dated November 7, 2002 between the Company
and HFG Healthco-4 LLC (Z)
10.120 Asset Purchase Agreement dated April 8, 2005 between the Company,
ATC Staffing Services, Inc. and Onward Healthcare, Inc. (AA)
21. Subsidiaries of the Company. *
23.1 Consent of Goldstein Golub Kessler LLP*
23.2 Consent of PricewaterhouseCoopers LLP*
24. Powers of Attorney. *
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.*
32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.*
- ----------------------
See Notes to Exhibits
41
NOTES TO EXHIBITS
-----------------
(A) Incorporated by reference to the Company's exhibit booklet to its Form
10-K for the Fiscal year ended February 28, 1995 (File No. 0-11380),
filed with the Commission on May 5, 1995.
(B) Incorporated by reference to the Company's Registration Statement on
Form S-1 (File No. 33-43728), dated January 29, 1992.
(C) Incorporated by reference to the Company's Form 8-K (file No.
0-11380), filed with the Commission on October 31, 1995.
(D) Incorporated by reference to the Company's exhibit booklet to it Form
10-K for the Fiscal year ended February 28, 1996 (file No. 0-11380),
filed with the Commission on May 13, 1996.
(E) Incorporated by reference to the Company's Form 8-A (file No.
0-11380), filed with the Commission on October 24, 1995.
(F) Incorporated by reference to the Company's Form 8-A (file No.
0-11380), filed with the Commission on October 24, 1995.
(G) Incorporated by reference to the Company's exhibit booklet to its Form
10-K for the Fiscal year ended February 28, 1998 (File No. 0-11380),
filed with the Commission on May 28, 1998.
(H) Incorporated by reference to the Company's Registration Statement on
Form S-4, as amended (File No. 33-9261), dated April 9, 1987.
(I) Incorporated by reference to the Company's Registration Statement on
Form S-8 (File No. 33-63939), filed with the Commission on November 2,
1995.
(J) Incorporated by reference to the Company's Registration Statement on
Form S-1 (File No. 3371974), filed with the Commission on November 19,
1993.
(K) Incorporated by reference to the Company's Form 10-Q for the quarterly
period ended November 30, 1997 (File No. 0-11380), filed with the
Commission on January 19, 1999.
(L) Incorporated by reference to the Company's Form 10-Q for the quarterly
period ended November 30, 1997 (File No. 0-11380), field with the
Commission on January 14, 1998.
(M) Incorporated by reference to the Company's exhibit booklet to its Form
10-K for the Fiscal year ended February 28, 1997 (File No. 0-11380),
filed with the Commission on May 27, 1997.
42
NOTES TO EXHIBIT
----------------
(N) Incorporated by reference to the Company's Form 10-Q for the quarterly
period ended November 30, 1996 (File No. 0-11380), filed with the
Commission on January 14, 1997.
(O) Incorporated by reference to Tender Loving Care Health Care Services
Inc.'s Form 10-Q for the quarterly period ended August 31, 1999 (File
No. 0-25777) filed with the Commission on October 20, 1999.
(P) Incorporated by reference to the Company's Form 10-Q for the quarterly
period ended August 31, 1999 (File No. 0-11380) filed with the
Commission on October 20, 1999.
(Q) Incorporated by reference to the Company's Form 10-K for the year
ended February 29, 2000 (File No. 0-11380) filed with the Commission
on July 17, 2000.
(R) Incorporated by reference to the Company's Form 10-Q for the quarterly
period ended August 31, 2000 (File No. 0-11380) filed with the
Commission on October 16, 2000.
(S) Incorporated by reference to the Company's Form 10-K for the year
ended February 28, 1999 (File No. 0-11380) filed with the Commission
on June 11, 1999.
(T) Incorporated by reference to the Company's exhibit booklet to its Form
10-K for the Fiscal year ended February 28, 1994 (File No. 0-11380),
filed with the Commission on May 13, 1994.
(U) Incorporated by reference to the Company's Form 10-Q for the quarterly
period ended August 31, 2001 (File No. 0-11380) filed with the
Commission on October 15, 2001.
(V) Incorporated by reference to the Company's Form 8-K (File No. 0-11380)
filed with the Commission on February 19, 2002.
(W) Incorporated by reference to the Company's Form 10-K/A (File No.
0-11380) filed with the Commission on June 28, 2001.
(X) Incorporated by reference to the Company's Form Def 14A (File No.
0-11380) filed with the Commission on June 27, 2001.
(Y) Incorporated by reference to the Company's Form 10-K for the year
ended February 28, 2002 (File No. 0-11380) filed with the Commission
on June 10, 2002.
(Z) Incorporated by reference to the Company's Form 10-Q for the quarter
ended November 30, 2002 (File No. 0-11380) filed with the Commission
on January 21, 2003
(AA) Incorporated by reference to the Company's Form 8-K (fileNo. 0-11380)
filed with the Commission on April 26, 2005
* Incorporated herein
43
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
ATC HEALTHCARE, INC.
By: /S/ DAVID SAVITSKY
-------------------
David Savitsky
Chief Executive Officer
Dated: ________, 2005
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
---------
/S/ DAVID SAVITSKY Chief Executive Officer _______, 2005
- ------------------
David Savitsky (Principal Executive
Officer) and Director
/S/ ANDREW REIBEN Senior Vice President, Finance, _______, 2005
- ------------------ Chief Financial Officer and
Andrew Reiben Treasurer (Principal Financial
and Accounting Officer)
/S/ STEPHEN SAVITSKY President and Chairman of the _______, 2005
- --------------------- Board
Stephen Savitsky
/S/ BERNARD J. FIRESTONE, PH. D. Director _______, 2005
- ---------------------------------
Bernard J. Firestone, Ph. D.
/S/ JONATHAN HALPERT, PH. D. Director _______, 2005
- -----------------------------
Jonathan Halpert, Ph. D.
/S/ MARTIN SCHILLER Director _______, 2005
- --------------------
Martin Schiller
By: /S/ DAVID SAVITSKY
------------------
David Savitsky
Attorney-in-Fact
44